The IRS collection process is the procedures the Internal Revenue Service implements to collect on a debt. The IRS offers its own brief rundown of its collection process that can be found here. Their guide explains more about how they collect on you. Our guide will go through what to actually do when you get IRS letters and how to navigate the IRS collection process. This guide is part of the TRP.tax tax help guide, an online resource to help taxpayers resolve their own tax problems or if hiring someone, understand the process better.
You can watch the video below and keep reading on for the written guide.
Step One: Understanding Your Stage In The IRS Collection Process
If you have already received a Final Notice of Intent To Levy, call the IRS right away or hire someone to represent you. Important Note: If you are seeking someone to help you, and they send you an IRS Form 8821 instead of an IRS Form 2848, this is a red flag. 8821 only gives them data and something a tax preparer uses, 2848 is used to actually represent you. Many non-law firms use IRS Form 8821 to gather data and submit a settlement, but do not actually call and deal with the collections department. This can result in unwanted levies, liens, and garnishment.
Most IRS collection cases will be with the Automated Collection System (“ACS”). There should be a phone number listed on the collections letter you receive that routes you to the appropriate area. . If not, you can call (800) 829-7650 and they will direct you. This is the main IRS collections number. When you speak with an agent, ask for additional time for you to send in a resolution. Ask for a hold on collection activity while they process your request, where to send it to, and a date to call back if you do not receive a response. The agents usually will give 10-30 days and you will not be garnished, levied, or have a lien issue during that time.
If your case is assigned to an IRS revenue officer, you may get a letter from that officer. Sometimes that letter will request information right away, and you can proceed to provide that information. Sometimes it is a generic letter asking for contact. Go ahead and call them and ask for time to get together a resolution. When a revenue officer is assigned it’s highly recommended to hire a tax attorney. However, if you are going it alone, make sure you do stay in contact with them and respond to their requests. If you plan on submitting an Offer In Compromise you can call the revenue officer and tell them this, and they will often not require you to send them financials as well. This saves time by just getting the settlement out and not having to prepare two sets of documents. If the debt is settled, the agent does not care they usually just want the case completed.
If you have only received an “Amount Due” letter, you have at least a few months before your case goes through the IRS collection process. See our guide on IRS letters to see how far away collection action is for you.
Step Two: Do An Accuracy Check
Once you file a tax return and you owe money, you will get a letter stating the amount due. You may also get a letter, called a CP 2000 Notice, for additional amounts due if the IRS finds an unreported income source, such as an additional 1099 or W2 that was not included in the tax return. If you are in an audit, this audit will be completed and your appeals rights exhausted before you get an amount due letter. If you never file a tax return, the IRS will sometimes file a Substitute For a Return. This all occurs before the IRS collection process begins.
Make sure the IRS has accurate tax debts assessed against you. Sometimes there is identity theft or the IRS has done an audit or CP 2000 Notice without your knowledge. If you have unfiled tax returns, the IRS usually comes up with a higher balance when they filed a Substitute For a Return for you. I will walk through the ways these are handled.
Identity Theft
For Identity Theft, you fill out IRS Form 14309 and send it in. If you do not get a proper resolution, contact the Taxpayer Advocate.
Audit
For an audit, it’s recommended to hire a local professional who specifically deals in audits, or have the tax preparer who prepared your return to represent you if they are familiar with audits. Although we are a tax relief law firm, we do not handle audits and recommend finding someone who is an expert in that particular area. Audits, as opposed to tax relief, are better done locally. Tax relief cases are mostly handled through email, phone, and mail, while audits often produce better results with a physical meeting.
You can also handle it yourself, but they can be very complex and this is usually not recommended unless you have every expense properly documented and categorized. Audits are best appealed if you do not like the results. Always ask for a penalty reduction at the end, you may be able to get rid of the accuracy penalty or at least some of it. A failure to pay a penalty will accrue if you take a while to pay the balance off. Make sure to request a First Time Penalty Abatement.
CP 2000 Notice
These are issued usually when a 1099 or W2 is not properly reported on your tax return. This notice can be responded to, but its best to contact your tax preparer regarding it. If you do not have a tax preparer, you can respond yourself or hire someone to help you. Many of these notices result in an amount due and often the IRS is right. However, always ask for a penalty abatement, sometimes it works in lowering an accuracy penalty if it was assessed.
Substitute For Returns
If the IRS has filed tax returns for you, you can still file and lower the balance due. If you were single, had no dependents other than yourself, and had only W2 income, it’s likely what the IRS filed is already accurate. If you were self-employed, had children, or were married, most of the time the Substitute For Returns will say you owe a larger balance.
You Owe and That’s That
If you owe and there is nothing to dispute, go to the next step. Or if the debt is disputable, once you have resolved the above issues, go to the next step.
Step Three: Figure Out Your Resolution
When you have an IRS debt that is undisputed, there are five ways it’s typically resolved:
Offer In Compromise
If you qualify, this is the best option. To qualify you generally need to have trouble making your monthly living expenses. See our Offer In Compromise Guide to see if you do. If you have more assets than the tax debt or have a high income, you most likely will not qualify.
Currently Not Collectible Status
This is effectively entering into a payment plan for $0 per month. To qualify you generally need to be not making or barely making your monthly living expenses. The debt does eventually expire, so sometimes this is the best option if your debts are expiring soon. If you have a lot of assets but not enough income to pay a payment plan, sometimes this works as an alternative to an Offer In Compromise. This requires that you fill out IRS Form 433F and send it in. If your case is assigned to a revenue officer, they will want an IRS Form 433A. If you fill out the form and show no ability to pay, you can get placed into Currently Not Collectible Status (“CNC” status).
Sometimes CNC should be entered into before submitting an Offer In Compromise. The main reason being if there is an active garnishment, it will get released when placed into CNC status. The agents usually will release levies when an Offer In Compromise is filed, but they do not have to, and you are left at their mercy.
Payment Plan
If you owe less than $50,000, the IRS will let you do an 84 month (this is new for 2017) payment plan that spreads the base tax amount over that period. This payment plan drags on longer due to penalties and interest. This less than $50,000 payment plan will avoid a lien being filed. Any payment plan that is entered into with over $50,000 of base tax debt will result in the filing of a Federal Tax Lien. If you owe over $10,000 and enter into a payment plan that is based on your financial data, rather than being spread out over 72 or 84 months, the IRS will also file a lien.
Bankruptcy
Income tax debts that are more than three years old can often be discharged in bankruptcy. This does not apply to payroll and sales tax debts. Consult a bankruptcy attorney in your area to make sure you can discharge your tax debts. If you are considering bankruptcy, consult a local bankruptcy attorney on your options. If you have plenty of other debts in addition to your tax debt that you cannot pay, bankruptcy often is the best route. However, if the tax debt is your primary debt, an Offer In Compromise of Currently or Not Collectible status is most often preferred. See our Bankruptcy or Offer In Compromise page for more information, which goes through some of the considerations on deciding which route is best for you.
Pay In Full
Send the IRS full payment. See our guide on the easiest ways to pay the IRS. If you have sufficient assets to pay off the debt, this is often the best result. Make sure to ask for a penalty abatement when you pay it off.
Do Nothing
You can let the debt sit and see what happens. Garnishments, Levies, and liens will probably be issued, but they may or may not hit you, as they are sent based on what the IRS has on file. The IRS generally has 10 years to collect on a personal tax debt. This time can be extended under certain circumstances such as a pending payment plan request, Offer In Compromise or Bankruptcy. Sometimes a client might be really close to the debt expiring, and in those cases doing nothing is best.
Step Three: Send In Your Resolution
Make sure to send your IRS resolution in before any collection deadlines. If you are mailing or faxing in something, it is recommended to call in by the deadline and let the IRS know you sent it in. If assigned to a revenue officer, call them to confirm receipt. If assigned to ACS, call the number on the letter received.
Offer In Compromise
Make sure you send it in before your collection deadline is up if you are in collections. Call the IRS collections line in your collections letter after you send it and let them know a settlement has been sent out. While the settlement is pending, no collection action will take place except for a possible lien. Our Offer In Compromise Guide goes through step by step on how to complete the settlement. Send the settlement certified mail with a return receipt.
Currently Not Collectible Status and Payment Plans
For Currently Not Collectible Status or payment plans, where you send it depends on the stage of your case. If you have received a collections letter, you can mail it back to the address on the letter. Send certified mail with return receipt. If you have received a Final Notice of Intent to Levy, make sure to call the listed number and let them know you have sent in your request. Ask them to place a hold on collections while the request is pending, and ask for a call back date if you do not hear back from the IRS. Sometimes the IRS loses these, pretends they never got it, and a levy or lien is issued against you.
If you have not received a Final Notice of Intent To Levy, you can mail in the payment plan request. If you owe under $50,000, you can request a payment plan online here. If you owe over $50,000 and do not have a clear hardship to qualify for Currently Not Collectible status, its recommended to hire a tax attorney.
Payment Plan
You can call the IRS to set up a payment plan or mail in the request. It’s usually easier to call and have them set up the payment plan and mail you the paperwork. If the balance is under $50,000, you can get the payment plan spread out over 84 months without a tax lien being filed. This just changed in 2017. In 2016 it was 72 months. If you owe over $50,000 the IRS will file a lien against you. Starting in 2017, the IRS is accepting 84 months spread-out payment plans for $50,000 to $100,000 balances. Balances over $100,000 will require a financial statement. From 433F is used for ACS and revenue officers use Form 433A.
If you owe over $10,000 and a financial statement is required a tax lien will be filed.
Bankruptcy
Once your bankruptcy is filed it will stop all IRS collection activity. If you have received a Final Notice of Intent to Levy, I do recommend calling the listed number and letting them know you have filed bankruptcy or plan to file soon.
Pay In Full
For paying in full, there is nothing to send in. Once the payment is processed, the IRS will stop bothering you.
Do Nothing
Wait and see what the IRS does. Sometimes they catch you, sometimes they don’t!
Step 4: Look For Response From the IRS and Respond Accordingly
The IRS will generally send a letter to you within 30 days for a payment plan, Currently Not Collectible request, or Offer In Compromise. The letter will often be an acknowledgment that they are working on your request and stating to please allow 45 days for a response. You later will then get a determination letter or a request for more information. Make sure to reply to their letter if they ask for more information. Send all replies by certified mail with a return receipt. If the case is assigned to a specific agent and a fax number is given, you can send the information to that fax number. If you fax, do a follow-up call to confirm they received it.
Once your request is in process and you get a confirmation letter, the IRS collection process is mostly stalled until the IRS is done processing your request. For payment in full and bankruptcy, they do not send any specific letters. IRS collection activity is placed on hold during bankruptcy. Paying in full ends any IRS collection activity.
Step 5: Wrap Up Your IRS Collection Process Resolution
Offer In Compromise
If accepted, you will get a letter stating what you have to pay and where to send the payment. Send it in and you are done. If denied, you may want to seek a Currently Not Collectible Status or a payment plan. If denied and you have good reasons for appeal, make sure to appeal the IRS’ determination. IRS Offer Examiners are wrong on financial analysis statements all the time, so don’t be afraid to contest their assessment with an appeal.
Currently Not Collectible Status
If accepted, you are done. If denied, you may end up in a payment plan. You will get a letter stating the IRS has closed its collection case on you and placed the account into Currently Not Collectible status. At that point, you are done if this is your final resolution.
Payment Plan
Once a final payment plan is arrived at, make sure to send in the required payments. Submit a 433D form to make the payment plan an automatic bank withdrawal.
Bankruptcy
If all your tax debts can be included in the bankruptcy, then once the bankruptcy is over you do not owe any more. If you have more recent tax debts that did not qualify for bankruptcy, these will eventually go to collections after the bankruptcy. If it’s a Chapter 7 bankruptcy, you have to wait eight years to file a
Pay In Full
Pay it off and you are done.
Step 6: Penalty Abatement For IRS Payment Plans and Pay In Full
This section applies to IRS payment plans or paying in full. Get some money back or at least applied to your other debts. Once you come close to paying the first year that you owe off, make sure to request a First Time Penalty Abatement. If you owe a series of years and are in a payment plan, if there are any years that were paid off before the payment plan was set up, see if you can get a First Time Penalty Abatement on the first year in the string of years that you owed on. If you have a previously paid-off year, request this when setting up your payment plan. Do not wait until your payment plan is done, as the ability to request that first-time abatement might expire. You only have two years to request a refund on the penalties.
If you have other valid reasons for penalty abatement on the other years owed, you may want to prepare a penalty abatement based on reasonable cause. Divorce, death in the family, sicknesses, natural disasters, or other things that would reasonably cause a person to delay filing and paying taxes. Finding a reason to come up with to explain why you did not pay or file on time may get you some savings. There also can be penalty abatements for IRS error if they miscalculated or you were wrongly advised by them. Its recommended sending penalty abatement requests on these other years when you have paid off the base tax and interest.
Step 7: IRS Tax Lien Withdrawal
Do this if you have liens on your credit report. This typically will not work for Bankruptcy, CNC status, or doing nothing and letting the balance drop. For Offer In Compromise, payment plans with a total balance under $25,000 that are not based on financials, and when you pay in full, be sure to request an IRS lien withdrawal at the end. There may be other circumstances where you can do it, but these are most applicable to what we are discussing here. Here is our guide on how to withdraw an IRS lien.
Then you are done. Each resolution might take some time to work out, but eventually, it will be over.
If you think you could benefit from the help of a tax attorney, schedule a consultation with one of our expert tax attorneys here or call us at (888) 515-4829.