By: Nick Richards, Esq., Matt Schiller, Esq., and L. Alexis Whitley, Esq.
“Taxation with representation ain’t so hot either.” — Gerald Barzan, humorist
When the Internal Revenue Service (“IRS” or “Service”) determines a taxpayer has an outstanding tax liability, the agency can use its vast collection authority to take action on the taxpayer’s delinquent tax debt. Depending on the taxpayer’s circumstances, the collections process can take different routes, leading to various options for resolution. This article provides an overview of the collections process, including important notices, differences between the Automated Collection System and field collections, and potential options for resolving a tax liability.
After the IRS assesses a tax, either through self-reporting on a tax return or through an audit assessment, the agency begins issuing a series of notices to inform the taxpayer and request payment, in the following order:
- Notice CP14 or CP161 advises the taxpayer of the tax due, including interest and penalties.
- Notice CP501, a reminder of the balance due.
- Notice CP503, a second reminder of the balance due.
This part of the collection timeline is known as “notice status.” After these automatically generated letters, the IRS sends Notice CP504, which advises the taxpayer that the Service intends to levy the taxpayer’s property and again provides the tax due. The CP504 looks threatening and mentions levying your assets, but it is not yet the final notice that comes with important constitutional and statutory rights. It is a sign, however, that the final notice is likely right around the corner.
The final notice the IRS issues can be one of the following:
- Notice LT11, a final notice of intent to levy;
- Letter 1058, a final notice of intent to levy; or
- Letter 3172, a notice of federal tax lien.
These letters all provide the taxpayer with the right to a hearing with the Independent Office of Appeals, which is called a Collection Due Process (“CDP”) hearing. CDP hearings provide taxpayers with the opportunity to challenge an IRS levy or lien before the action is taken, protecting the taxpayer’s assets while a resolution is reached. They also allow taxpayers to challenge the validity of the liability, or to propose alternatives to enforced collection, such as Installment Agreements, Offers in Compromise, or Currently Not Collectible status. These notices and the right to a CDP hearing are important taxpayer rights and, should the IRS fail to provide them, the agency cannot uphold a levy or a lien.
Taxpayers might receive other notices during the collections process, such as:
- Notice CP14H, a first notice of tax due resulting from not having the minimum essential health coverage.
- Notice CP14I, a first notice of tax due resulting from withdrawing less than or depositing more than the allowed amount related to individual retirement accounts.
- Notice CP16, notifying the taxpayer of the Service’s right to offset tax liabilities with tax refunds.
- Notices CP21 and CP22, notifying the taxpayer of changes made to their return.
- Notices CP23 and CP24, notifying the taxpayer of changes made to their return based on differences in the amount of estimated tax payments.
- Notice CP39 and CP49, notifying the taxpayer part of their refund was applied toward their tax debt.
- Notice CP40, assigning a delinquent account to a private collection agency.
- Notice CP89, annual installment agreement notice.
- Notice CP90, final notice of intent to levy.
- Notice CP91, notice of intent to levy Social Security benefits.
- Notice CP3219A, notifying the taxpayer of income tax adjustments due to information received from third parties, such as banks and employers, and providing instructions on challenging the adjustment in Tax Court.
- Notices CP521, CP521 (SP), and CP621, reminding the taxpayer of an installment payment due.
- Notice CP523, notice of intent to terminate an Installment Agreement and levy assets.
- Notice CP71A, reminding taxpayers of their balance due and explaining their account will remain in Currently Not Collectible status until their financial condition changes.
- Notice CP71C, notifying the taxpayer of their unpaid balance.
- Letter 16, notifying the taxpayer the Service is attempting to collect unpaid taxes or is showing missing tax returns.
- Letters 3171, 3177, and 3886, notice of federal tax lien filing for unpaid balances.
- Letter 5972C, notifying the taxpayer there is a balance due.
The final collections notice is sent by one of two branches within the IRS that carry out the collections process: the Automated Collection System (“ACS”) branch or the field collection office. ACS is the computer system and nationwide call centers used for automated tax collections, allowing the branch to handle high volumes of cases. A large team of IRS staff work in this branch. However, this means that taxpayers working with ACS might speak to different IRS employees each time they contact the IRS about their case, making it imperative to prompt the Service to make detailed notes on the taxpayer’s account and call to follow up regarding any proposals made or financials sent to ACS. Our group of attorneys has proven and time-tested strategies for resolving cases with ACS, while protecting your assets and income.
Alternatively, some taxpayer cases, such as those with complex issues or large tax liabilities, may be routed to a Revenue Officer in a local field collection office. Because the case is assigned to a single Revenue Officer within a field collection office, taxpayers speak to the same employee each time they contact the IRS about their case, offering consistency and familiarity. Revenue Officers working in field collection offices can also make in-person contact with the taxpayer. Revenue Officers can sometimes act aggressively, and contact from a Revenue Officer can seem intrusive and embarrassing, making it important to hire representation at this stage if you have not already. A Revenue Officer is trained to collect the tax as quickly as possible, so you can be assured that a Revenue Officer will move urgently toward bank levies, wage garnishment, or even asset seizure, especially if you do not provide requested financial information or if you ignore their attempts at contact.
Whether a taxpayer’s case is worked by ACS or a Revenue Officer, reaching a resolution for the outstanding tax liability is the ultimate goal. Taxpayers have various potential resolution options depending on their financial circumstances and conditions. For example, taxpayers with little income, high expenses, and no ability to pay their tax liability can qualify for Currently Not Collectible (“CNC”) status, which will temporarily (usually in two-year increments) prevent collection actions until the taxpayer’s financial condition improves.
Taxpayers who have the ability to address their tax liability can enter into an Installment Agreement (“IA”), a formal agreement with the IRS under which taxpayers make monthly payments on their liability based on their reported income, expenses, and assets. While an IA is pending, processing, and in place, the IRS is prohibited from taking collection actions such as bank levies and wage garnishment. Finally, taxpayers with liabilities that are disputed or too high to pay in full within the ten-year collection statute may qualify for an Offer in Compromise (“OIC”). An OIC allows the taxpayer to offer an amount less than their full tax liability to settle the debt. Both IAs and OICs require taxpayers be current on their filings and estimated tax payments. If a taxpayer is not current with these obligations, the CDP hearing can serve as a valuable resource to give the taxpayer time to file all necessary returns and make estimated tax payments.
Regardless of the resolution option proposed, the taxpayer will need to gather and provide financial documents, such as bank and income statements, for the IRS to evaluate the resolution. During this process, it is important to maintain clear communications with the IRS and obtain holds on collection actions to ensure time to provide the required information. This process is varied, and the IRS can make mistakes such as failing to accurately document efforts to resolve or acknowledge financial documents provided, so it is important to have an experienced representative protecting your interests.
The IRS collections process is a detailed and complex process that many taxpayers face. For questions about the collections process or assistance with your collections matter, contact Nick Richards ([email protected]) or Matt Schiller ([email protected]) at Greenspoon Marder.
