The IRS collections process can seem incredibly daunting and often instills fear in taxpayers. The first thing to understand, is the IRS will not immediately break down your door or throw you in prison when you cannot pay the tax you owe. However, making yourself aware of the process can save you time, headaches and, potentially, money.
The IRS can attempt to collect tax for up to ten years from the date it is assessed. However, upon certain actions, that time period can be suspended.
Below is a listing of various correspondence the IRS will issue after a failure to pay tax (including IRS correspondence codes):
- Initial Notices (CP501 & CP503): The IRS informs you there is an outstanding tax liability on one of your tax accounts by issuing two reminder notices. From the date of the first notice, taxpayers have 30 days to either pay the tax due or respond before receiving the second notice. Taxpayers then have another 30 days to either pay the tax due or respond before receiving a Notice of Intent to Levy.
- Notice of Federal Tax Lien (668Y): A federal tax lien is a legal claim against current and future property and can “attach” to certain property like your car or home. Public notice is given to creditors to inform them a lien exists on the property and the IRS has priority over the claims of future creditors. Although a lien is different from a seizure of property (discussed below), it can have a negative economic impact such as adversely affecting your credit score and your ability to obtain employment or a mortgage. The IRS can file a Notice of Federal Tax Lien at anytime when tax liabilities are outstanding to secure the government’s interest in the tax that is due.
- Notice of Intent to Levy (CP504): A levy is a legal seizure of property and taxpayers have 30 days from the date of the levy notice to either pay the overdue taxes, make other arrangements to pay the tax, or request a hearing. The IRS will first seize property such as wages, retirement income, bank accounts, and social security benefits before seizing your car or home. The IRS will also likely offset any other federal tax refunds for other tax types or tax years with the tax liability owed. Certain property is exempt from seizure such as unemployment benefits, certain annuity and pension benefits, worker’s compensation and court-ordered child support payments.
- Final Notice of Intent to Levy and Notice of Your Right to a Hearing (CP90): This is the final notice taxpayers receive before the IRS starts seizing property.
If you have received any of the above correspondence, and have an outstanding tax liability you are unable to pay, certain remedies can help alleviate the consequences of failing to pay your taxes on time:
- Ask for a temporary delay: If a taxpayer’s financial condition impacts the ability to pay the tax owed, they can contact the IRS by calling the number on the notices received to request a temporary collection delay. The taxpayer may be asked to complete a Collection Information Statement (Form 433-F, 433-A, or 433-B) prior to the approval of the delay to prove their financial status and inability to pay.
- Apply for an Installment Agreement: An Installment Agreement allows taxpayers to make smaller periodic payments if they can’t pay the full amount at once. To be eligible for an Installment Agreement, the taxpayer must have filed all required tax returns. A Collection Information Statement (discussed above) may also be required and the ten-year IRS collection period is suspended while it considers the request. After the IRS approves the request for an Installment Agreement, the taxpayer must remain compliant regarding all future tax returns and tax payments, including quarterly estimated taxes. Interest and penalties will still be charged until the balance is paid in full and a Notice of Federal Tax Lien may still be filed.
- Collection Due Process Hearing: If the taxpayer disagrees with collection actions taken or proposed, a Collection Due Process Hearing can be requested (Form 12153). Taxpayers may only request a Collection Due Process Hearing after receiving certain types of notices, two of them being a Notice of Federal Tax Lien and a Notice of Intent to Levy and Your Right to a Hearing . A hearing may take place over the telephone or in person and once granted, the taxpayer may discuss all related issues and supporting information with an Appeals Settlement Officer. During a Collection Due Process Hearing, the ten-year collection period is suspended.
- Collection Appeals Program: if the taxpayer disagrees with an IRS employee’s decision about a levy, seizure, or Notice of Federal Tax Lien, they can ask to have a conference with the employee’s manager. If the taxpayer then disagrees with the manager’s decision, they may request the IRS Office of Appeals review the case under the Collection Appeals Program. After a decision is issued by the IRS Office of Appeals and the taxpayer continues to disagree, they cannot proceed in court.
- Apply for an Offer in Compromise: An Offer in Compromise can be requested to settle the balance of taxes owed by a taxpayer if they cannot pay the amount in full or through installments (Form 656). For the IRS to consider accepting an Offer in Compromise, the taxpayer must have insufficient assets and income to pay the tax due, the IRS may not agree the tax debt is accurate, or to pay the amount due would cause an economic hardship or be unjust. Similar to an Installment Agreement, a taxpayer must have filed all required tax returns to be eligible and also must make all required estimated tax payments for the current year.
Topics: IRS Collections, IRS Installment agreements, Notice of intent to levy, Notice of federal tax lien, Notice of your right to a hearing, Collection Due Process Hearing, Offer in Compromise, Collection Information Statement