It’s hard to think of anything more stressful and damaging than dealing with IRS collections. Uncle Sam is the last person you want to owe money to because of the vast information and tools the IRS has its disposal. Most taxpayers get themselves in these situations by getting behind on filing their tax returns. These taxpayers tend to be independent contractors or small business owners who were busy running their businesses, and continued to put their taxes off. When the taxpayer eventually files the late returns, there’s sometimes a hefty tax bill along with penalties and interest. If taxpayer is unable to pay or make arrangements, what follows then is a series of enforcement actions by the computerized notice system, automated collections system, and finally a meeting with an IRS Revenue Officer.
IRS Computerized Notices
As with any organization, the IRS has limited resources and has to find ways to be cost-efficient. The IRS does this by using an automated system for generating notices for the initial steps in assessing and collecting tax debt.
After you file a return, the return is processed into the Individual Master File (IMF) or Business Master File (BMF) application. The tax, including penalties and interest, as well as any payments are then posted to the file. The IMF then outputs the information into another application called IMF Discriminant Function (DIF) and an IRS supercomputer assigns your tax return a DIF score using a proprietary IRS algorithm. The DIF identifies discrepancies and high audit potential tax returns. We’ll save the audit process for another topic to focus on collections for now.
After the taxes, penalties, and interest (balance) has been posted to your account, a Computer Paragraph (CP) notice is automatically mailed out. Your file is now deemed a tax delinquency account (TDA) and you will receive a notice CP-14 which informs you that you have unpaid taxes.
A month or so after the CP-14, the IRS computer will begin to send out the “500 series” of notices:
- CP-501/502 – “You have a balance due”
- CP-503 – “Immediate action is required”
- CP-504 – “You have an amount due – intent to levy”
The CP-501/502 letter informs you that you have an unpaid balance and sets a due date for the payment. If you fail to respond or make payment, the IRS sends out a CP-503 letter. If you choose to ignore this notice, you’ll receive a CP-504 stating that the IRS is intending to levy one or more of your assets.
After several months, you’ll receive a CP-90 notice or Letter 1058 “Final notice – intent to levy and notice of your right to a hearing.” These notices are very important notices because they give you 30 days to file a collections due process hearing to appeal the levy. Always request the hearing because it will give you a chance to meet with the Appeals office as well as protect your right to file in tax court. While the vast majority of cases do not go to tax court, it is additional leverage you have with the IRS.
During this process, the IRS may at any time file a Notice of Federal Tax Lien (NFTL) which will usually be filed in the county of your last known address. Technically, the IRS already has a lien as soon as taxes have been assessed, but it will not be recorded publicly until the NFTL has been filed. An NFTL will ruin your credit rating and make it difficult to sell existing property. If the IRS files a NFTL, you are allowed a 30 day window to request an administrative appeal through the Collections Appeals Program (CAP) or the Collections Due Process (CDP). It is not crucial to request a hearing with a NFTL as it is with a levy, unless you dispute the taxes assessed.
Note: If you owe payroll taxes or more than $50,000, collections may be accelerated. For example, you may not receive a CP-503 or 504. It may go straight from CP-14 to CP-90. As a side note, you should never get behind on payroll taxes. The IRS pursues unpaid payroll taxes quickly and aggressively. The IRS considers it theft of federal monies.
Automated Collections System
At this point your file is with the Automated Collection System (ACS), where the ACS computer and ACS collectors will continue to mail collection letters and issue levies. As with CP notices, you can ask for more time to pay. A short-term hold of 45 days is usually provided upon request. If you’re able to demonstrate that you are without a job and have no significant assets, you may be able to get a long-term hold of a year or more by requesting that your account be classified as “currently not collectible.”
At any time, you have the right to question the accuracy of the bill. This will delay the ACS process by a few weeks or months until the tax debt is verified by the IRS. If the the request for a hold is not provided, you can speak to a manager or contact Taxpayer Advocate Service.
You may obtain even more time and possibly tax relief by submitting an offer in compromise or filing for bankruptcy. You can also still request a streamlined installment agreement if your tax debt is below $50,000 ($25,000 for business). Once you enter into the agreement, collections activities will cease, and you’ll pay an equal monthly installment over a period of 72 months, usually at a 3% interest rate. If your balance is over $50,000, you’ll likely have to negotiate with the IRS and submit a financial statement on Form 433-A/F (individuals and self-employed) or Form 433-B (businesses). The financial statements will provide the IRS with an idea of how much you’d be able to pay per month. Your next step will be to negotiate with an ACS collector over the phone. You’ll be asked probing questions regarding your financial assets, such as bank balances and home equity. It is never OK to lie to the collector, but it is acceptable to say “I need to check my records” or “I’m not sure”. You are not obligated to provide any information that you do not want to, as long as you’re not telling a lie. Be forewarned: IRS collectors are aggressive and this process can be nerve-racking.
Your file will probably end up on the desk of a local IRS Revenue Officer if you owe $250,000 or more.
Your first encounter with a Revenue Officer (RO) may be an unannounced visit to your home or work. If you’re lucky, the RO will call you first to set up an appointment. At the first meeting, the RO will conduct a personal interview to gather details of your finances and record them on a Collection Information Statement (433-A, 433-B, or 433-F). While you are not legally obligated to provide any information to the RO, it may benefit you to cooperate. A lack of cooperation may result in rapid enforcement action or a legal summons. At the conclusion of the interview, you’ll be asked to sign the financial disclosure forms, which you should not rush into. You may have understated your expenses, which would overstate your finances and cause the IRS to demand you to pay more money than you are able to. You should take your time to review and document your actual living expenses.
The financial data will determine which steps the IRS will take next.
- If the forms show that you are able to pay in full, the IRS will demand immediate payment
- If you have little cash flow but significant assets, the IRS may request that you sell any unnecessary assets
- If you have earning potential but are currently not able to pay in full, the IRS may suggest an offer in compromise or an installment payment agreement
- If you’re financially insolvent (or close to it), the IRS may inform you of your bankruptcy options and place your account in currently not collectible status
- Or the IRS may decide to proceed with collection enforcement, such as levying wages, bank accounts, and other assets.
The last option is usually your worst case scenario. The IRS can seize just about anything you own, including your business assets. Contrary to common belief, your personal vehicles, retirement accounts, and primary residence (with court order) can be seized. There are still options you can take to prevent further levying of personal and business assets.
The IRS collections process is a complex maze of rules and procedures. While you should always aim to never be in such a situation, if you do find yourself owing back taxes, it’s important to retain an experienced local tax professional.