Does the IRS Sell Debt to Collection Agencies?

The Internal Revenue Service (IRS) does not sell taxpayer debt to private collection agencies. However, it does utilize private collection agencies (PCAs) to assist with the collection of certain overdue tax accounts, focusing on older tax receivables.

The IRS’s Use of Private Collection Agencies

The IRS does not sell tax debt; it remains owed to the U.S. Treasury. Instead, the IRS contracts with PCAs to collect certain inactive tax receivables. This practice was mandated by Congress in 2015 under the Fixing America’s Surface Transportation (FAST) Act, with the program starting in 2017, to leverage private sector resources.

PCAs handle older, inactive tax debts where the IRS has exhausted its efforts or had difficulty locating the taxpayer. This includes cases inactive for a year or more than two years since assessment. Excluded accounts include those of deceased individuals, taxpayers under 18, identity theft victims, or those receiving Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI). Taxpayers in active examination, litigation, criminal investigation, or with a pending Offer in Compromise or Installment Agreement are also excluded.

PCAs have specific limitations. They can identify themselves as IRS contractors, inform taxpayers of their debt, and discuss payment options. However, they cannot take enforcement actions like filing a tax lien, issuing a levy, or seizing property. PCAs also cannot accept direct payments; all payments must go to the IRS or U.S. Treasury. They cannot negotiate offers in compromise or determine if an account is currently not collectible.

Taxpayers retain rights when dealing with PCAs, including the right to request to work directly with the IRS. To discontinue contact with a PCA, send them a letter. The taxpayer must then contact the IRS to resolve their debt. PCAs must follow the Fair Debt Collection Practices Act and respect taxpayer rights.

IRS Direct Debt Collection Methods

While PCAs assist with inactive accounts, the IRS has direct powers to collect unpaid taxes. These enforcement actions are distinct from private agencies and are initiated directly by the IRS, typically after sending multiple notices.

A common IRS enforcement action is a Notice of Federal Tax Lien. This public legal claim against a taxpayer’s property, such as real estate or vehicles, secures the tax debt. A lien establishes the government’s legal right to the property without immediate seizure. It serves as a public record, alerting creditors and affecting a taxpayer’s ability to sell property or obtain credit.

A Notice of Levy is the legal seizure of a taxpayer’s property to satisfy a tax debt. This can include bank accounts, wages, and other assets. Before issuing a levy, the IRS typically sends a Final Notice of Intent to Levy and informs the taxpayer of their right to a hearing, usually 30 days in advance. Unlike a lien, a levy directly takes the property to pay the debt.

Wage garnishment, a form of levy, allows the IRS to seize a portion of a taxpayer’s earnings from their employer. The IRS can also seize state tax refunds to offset federal tax liabilities. These actions highlight the IRS’s authority to secure unpaid taxes when other efforts fail.

Taxpayer Remedies for Unpaid Taxes

Taxpayers with unpaid tax liabilities have several options to resolve their debt directly with the IRS. These remedies provide relief based on financial circumstances and can prevent severe collection actions. The IRS encourages communication to find a suitable resolution.

An Offer in Compromise (OIC) allows taxpayers to settle their tax debt for a lower amount. The IRS may accept an OIC if there is doubt as to collectibility (taxpayer cannot pay without financial hardship), doubt as to liability (dispute over whether the tax is owed), or if it promotes effective tax administration due to exceptional circumstances. To apply, taxpayers submit Form 656 and detailed financial statements, such as Form 433-A or 433-B, along with a non-refundable application fee and an initial payment.

An Installment Agreement provides a structured payment plan for taxpayers who cannot pay immediately but can make regular payments. This allows monthly payments for up to 72 months. Individual taxpayers owing $50,000 or less in combined tax, penalties, and interest, and who have filed all required returns, may qualify to apply online. Short-term payment plans, up to 180 days, are also available for brief extensions.

In severe financial hardship, taxpayers may qualify for Currently Not Collectible (CNC) status. If approved, the IRS temporarily halts most collection efforts, like levies and wage garnishments. This status is not permanent debt forgiveness but provides a temporary reprieve, allowing taxpayers to address basic living expenses. To qualify, taxpayers must show that paying the debt would prevent them from affording necessary living costs, often requiring detailed financial statements like Form 433-F. Interest and penalties continue to accrue while an account is in CNC status.

Verifying Official IRS Communications

To distinguish legitimate IRS communications from scams, taxpayers should note that the IRS typically initiates contact via regular mail. Official IRS letters display the Department of the Treasury or Internal Revenue Service logo and include a notice or letter number, usually in the top right corner, which can be cross-referenced on the IRS website.

If a private collection agency is assigned an account, the IRS first sends Notice CP40 to inform the taxpayer of the referral. The assigned PCA then sends its own initial contact letter. Both letters contain a unique Taxpayer Authentication Number to verify legitimacy.

The IRS and its authorized PCAs will never demand immediate payment via gift cards, wire transfers, or prepaid debit cards. Legitimate calls from PCAs occur after initial letters are sent, and they identify themselves as IRS contractors. If uncertain, do not provide personal information or make payments. Instead, call the IRS directly to verify or check your IRS online account for balance information.