Understanding the IRS Collection Process

The IRS has a process to go about collecting taxes owed by the taxpayer. The IRS does not spring about levies, liens, garnishments, and seizure of property without fair warning. Generally, taxpayers who get into issues with the IRS, failed to file tax returns or ignored the IRS letters for payment.

Let’s step through the process to see that the process is fair and not daunting.

  • After filing the tax return, the IRS will process and assess the tax.
  • The IRS will mail a billing notice to inform you of a balance due and if the bill is unpaid.
  • A silent lien arises automatically by statute. It attaches to all assets owned by taxpayer and assets acquired in the future.
  • The IRS will send reminder letter threatening to take levy action if taxpayer does not pay or work with the IRS.
  • If no action occurs, IRS will issue a CP-504 Threat to Levy letter.
  • The IRS sends a final notice of its intent to levy taxpayers’ income and assets. This starts the 30-day period that the taxpayer has to request an IRS collection due process hearing. If 30 days pass, the taxpayer has a year to request an equivalent hearing which cannot go to appeals. This final notice will include the Form 12153 to Request a Collection Due Process Hearing or Equivalent Hearing.
  • The IRS files a Notice of Federal Tax Lien if the taxpayer owes more than $10,000. This is available for all creditor to see in public records. It is from these public records that taxpayers will get a lot of mail from IRS tax relief companies.
  • If you did not make a request for appeals, the IRS will issue a Notice of Levy. This is when the seizing of assets begins. Wage garnishments, clearing out bank accounts, even seizing real estate.
  • This will continue until the taxpayer makes the decision to work with the IRS to get the issue under control.

As you can see, there is plenty of opportunity afforded to the taxpayer to work with the IRS for resolution.

Now, let me share some details on the collection process.

Tax Assessment

Before any collections can take place, there needs to be an assessment of taxes. There are some 10 million non-filers, and these individuals have no worries of levies or liens. But the IRS plan to make these non-filers a priority and move toward obtaining the tax returns.

The IRS will send a letter requesting the taxpayer to file their return and then assess a tax liability. If after processing the return, the taxpayer owes money, the IRS will send a bill. The matter is closed if the taxpayer makes payment.

Without a payment made, the IRS will pursue the taxpayer with more letters requesting payment. If taxpayers fail to file their taxes when requested, the IRS will take more aggressive actions against them. As a consequence, they will face a 25% Failure-to-File penalty. There is no benefit to the taxpayer for not filing when requested by the IRS.

If the taxpayer chooses not to file, the IRS will file a return for them, called a Substitute for Return (SFR). This type of tax return is not in favor of the taxpayer. It often leads to a significantly higher amount owed compared to filing a different return. The IRS will not consider expenses, itemized deductions, or credits.

If an SFR filing happens, the taxpayer should file their own return to lower the amount owed. There is another issue with the IRS creating an SFR for the taxpayer. Once filed, that tax year is never dischargeable in bankruptcy. You can file a return to replace the SFR and change the liability, but the tax year will never be dischargeable.

If the IRS does not have third party information, such as W-2 or 1099 to create an SFR, the case will be assigned to a Revenue Officer (RO). The RO will contact the taxpayer and request the missing tax return. If the taxpayer does not provide the return, the RO will summon them to appear with the books and records. It would be best for the taxpayer to complete the return if they receive a summons.

IRS Informs Taxpayers with Letters

The IRS will always communicate by various letters that there are taxes owed. It is a very methodical process, and the letters are system generated. If IRS does not receive payment by the due date, the system will generate the next letter.

The IRS will send three letters to prod the taxpayer to take action. If taxpayer chooses not to respond, IRS sends a final letter.

CP-501 is the balance due notice generated from the assessed tax return.

CP-503 is a reminder notice stating that you still have an unpaid balance.

CP-504 is a serious letter that warns the taxpayer that their situation is getting serious, and they may face a levy. It is Notice of Intent to Levy.

LT11 or 1058 is the Final Notice of Intent to Levy and Your Rights to a Hearing. Along with this notice will be Form 12153 Request for a Collection Due Process or Equivalent Hearing. The taxpayer should contact the IRS or a tax professional to represent and begin working with the IRS. Be sure to send Form 12153 to stop levy action while working on a resolution.

Send Form 12153 to the Revenue Office within 30 days of the final notice for the CDP Hearing. The RO will forward it to the Office of Appeals if we cannot reach a resolution. You can still get an Equivalent Hearing if you send Form 12153 after 30 days and before 1 year has elapsed. The decision from the Equivalent Hearing is final, there is no appeals.

Collection Appeals

When you go to appeals you follow the same process of gathering information and presenting your proposed resolution. This is where you can propose a collection alternative such as an installment agreement or other payment plan. There is an opportunity to present additional supporting documents and to work with an independent office.

The CDP will stop collection action for the tax years in question. An Equivalent Hearing does not stop collections. To stop collections, contact the IRS and request a hold while they review the case.

Taxpayers can go to Tax Court if they don’t reach a fair agreement in appeals.

Future blogs will cover the Tax Lien and Tax Levy.

For more information regarding the IRS Collection Process, please contact Dan Ohara @ (408) 684-8505 or e-mail at dan@oharataxresolution.com