Understanding the IRS Collection Process (Part 4)
By: Margaret Fichtner
This is the last entry in our 4-part series of understanding the lifecycle of a tax controversy. In Parts 1, 2 & 3 we discussed an overview of a controversy, understanding the audit process, and also the appeals process. In this 4th and final entry we will discuss what happens after a taxpayer files their Tax Return or has their tax due adjusted through an audit – the IRS collection process. Below is a discussion of how IRS collection proceeds and important notices to identify and address immediately:
- If a taxpayer owes taxes to the IRS, the IRS will send them a bill in the form of a CP501 Notice that will calculate the Tax, Penalties and Interest owed.
- If the bill is not paid, the IRS will issue a subsequent notice that will reflect additional accrued Penalty and Interest. This will be sent to the taxpayer via a CP503 Notice.
- If the bill remains unpaid, the IRS will issue a Final Demand Notice which will be a LT11 and CP504 Notice if issued by the IRS Service Center or a LTR1058 Notice if issued by a Revenue Officer.
- Some of these notices have appeal rights, and if the taxpayer chooses to appeal, all collection activity will stop and the taxpayer will be allowed to propose a collection alternative to an IRS Appeals Settlement Officer. If the appeal is not taken within the relatively short period allowed, the IRS may proceed with collection activity, including levy of accounts or seizure of assets.
- If the taxpayer doesn’t pay the amount due or advise the IRS that they either can’t pay or that they disagree with the bill, Collection Action may begin.
- The IRS may also file liens related to outstanding tax debts. Once a tax debt is assessed, the IRS has a silent lien on all property. However, for the IRS lien to have the same rights that other secured creditors enjoy, the IRS must file a Notice of Federal Tax Lien. When the IRS files a Notice of Federal Tax Lien, it must issue a form Letter 3172, which will notify the taxpayer of the lien filing and of their appeal rights. As discussed above, the appeals rights associated with this notice must be exercised within 30 days to ensure the IRS will stop all collection action.
What can a taxpayer do to resolve their tax debt when they cannot pay in full?
In cases where a taxpayer is unable to fully satisfy their tax debt, there are options available to them that may reduce or in some cases even eliminate their tax debt:
- Apply for an Installment Agreement:
The IRS may allow a taxpayer to make smaller periodic payments over time. Options depend on the amount of tax due and the time required to pay the balance.
- Apply for an Offer-In-Compromise (OIC):
If a taxpayer can’t pay the amount owed in full or through installments, the IRS may accept an Offer In Compromise for less than the total amount due.
The IRS may accept an OIC based upon three circumstances:
- A tax debt may not be accurate (Doubt as to Liability),
- A taxpayer’s assets and income are not sufficient to pay the balance owed in full (Doubt as to Collectability), or
- Where there are exceptional circumstances (Effective Tax Administration) that would either create an economic hardship or would be unfair or inequitable to the taxpayer.
In circumstances where an Offer In Compromise is not viable for any number of reasons but the taxpayer still cannot pay the tax in full, the taxpayer may qualify for Currently Not Collectible status. Where a taxpayer cannot pay the tax liability in full or by making payments through an Installment Agreement because it would cause an undue hardship to the taxpayer by preventing them from meeting basic living expenses, the IRS may delay collection until the taxpayer has an ability to pay. Based on the amount owed, the IRS may require completion of a Collection Information Statement to evaluate their ability to pay.
NOTE: Penalty and Interest will continue to accrue and a Notice of Federal Tax Lien may be filed depending on outstanding balance.
It is also important to note here that in very specific cases, Bankruptcy may also be an option available to a taxpayer to eliminate a tax debt. The rules around resolving tax debts through bankruptcy are very complex, and we’ve previously written about this topic here.
How long does the IRS have to collect a tax debt?
Generally, the IRS has 10 years from the Date of Assessment to collect the tax due balance. However, there are some circumstances where this time period can be suspended, and thus will extend the statute. Some of these situations are as follows:
- While the IRS is considering an Installment Agreement or an Offer-In-Compromise. If an Installment Agreement or OIC request is rejected, the statute will be suspended for an additional 30 days and during the period the Appeals Office is considering the appeal request.
- If the taxpayer has lived outside the U.S. continuously for at least 6 Months.
- The tax periods that are subject to IRS collections are included in a Bankruptcy with an Automatic Stay which prevents the IRS from taking collection action against the taxpayer. In this situation, the statute will be extended for the period of the Automatic Stay, plus 6 months.
- A Collection Due Process hearing request will suspend the statute from the date of the request until a notice of determination is issued or a final tax court decision is made.
- When Innocent Spouse Relief is requested, the statute is suspended during the consideration and for an additional 90 days after Notice of Determination is issued. A petition to tax court will further extend the statute.
The IRS collection is a complicated and stressful process. The IRS has collection powers far in excess of most creditors. Because of this, it is extremely important to ensure that all correspondence is read and important dates are identified. Where questions arise, a tax attorney should be consulted to ensure that the IRS is following their procedures properly and that the taxpayer has every opportunity to exercise their rights to ensure the collection process is no more intrusive than it needs to be. The attorneys at Andreozzi Bluestein LLP, have extensive experience handling all aspects of the IRS Collection process. Should you ever encounter issues related to IRS collections and need legal support, contact the professionals at Andreozzi Bluestein LLP for a no obligation consultation on your matter.
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