Does the IRS Send Debt to Collection Agencies?

The Internal Revenue Service (IRS) handles tax collection directly, but also utilizes private collection agencies. This program helps the IRS manage its workload and collect overdue tax debts that might otherwise remain unaddressed. Understanding how this program operates, what to expect if contacted, and your rights as a taxpayer is important for navigating tax obligations.

The IRS’s Private Debt Collection Program

The IRS is authorized by federal law to use private collection agencies for certain overdue tax debts, a program revived by the Fixing America’s Surface Transportation (FAST) Act in December 2015. This program aims to recover older, inactive tax debts that the IRS may not have the resources to pursue actively.

The IRS contracts with a limited number of authorized private collection agencies, including CBE Group Inc., Coast Professional, Inc., and ConServe. These agencies act on behalf of the IRS to identify taxpayers and discuss payment options.

Not all tax debts can be assigned to private agencies. Accounts are excluded if the taxpayer is deceased, under 18 years of age, in a designated combat zone, or a victim of tax-related identity theft. Accounts are also excluded if the taxpayer receives Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI), or if their adjusted gross income does not exceed 200% of the applicable poverty level. Furthermore, debts subject to an Offer in Compromise, an installment agreement, innocent spouse relief, or currently not collectible status are not assigned.

Identifying Legitimate IRS Collection Attempts

Initial contact from a legitimate private collection agency will always be through official mail. The IRS will first send you a Notice CP40, informing you your overdue tax account has been assigned to a private collection agency and providing its name and contact information. This notice includes Publication 4518, outlining what to expect. Following the IRS letter, the private collection agency will send its own letter confirming the assignment of your unpaid tax liability.

Both the IRS Notice CP40 and the private agency’s initial letter will contain a Taxpayer Authentication Number. This number verifies your identity and confirms the legitimacy of the agency’s contact. The private collection agency will not contact you by telephone before these letters have been sent. After the letters are received, the agency may call you to discuss payment options and help resolve your account.

Legitimate agencies will identify themselves as IRS contractors collecting taxes and will respect taxpayer rights, adhering to the Fair Debt Collection Practices Act. They will not demand immediate payment via unconventional methods like gift cards, wire transfers, or cryptocurrency. Agencies will also not threaten arrest, deportation, or demand payment without allowing you to question or appeal the amount owed. Taxpayers should always make payments directly to the U.S. Treasury, not to the private collection agency. If you are unsure about the legitimacy of a contact, you can verify it by calling the IRS directly at 800-829-1040.

Your Rights and Options When Contacted

Taxpayers contacted by a private collection agency have specific rights and various options for resolving their tax debt. You have the right to request that the private agency cease contact and deal directly with the IRS. This request should generally be made in writing to the private collection agency. Once this request is made, the account will be returned to the IRS for direct handling.

Even if your account is assigned to a private agency, the ultimate resolution options are handled by the IRS. One option is an IRS installment agreement, allowing monthly payments over an extended period, typically up to 72 months, to pay off your tax debt. Eligibility for an online installment agreement generally requires owing $50,000 or less in combined tax, penalties, and interest, and having filed all required tax returns. Interest and penalties continue to accrue on unpaid balances under an installment agreement.

Another possibility is an Offer in Compromise (OIC), allowing certain taxpayers to settle their tax debt for less than the full amount owed. An OIC is typically approved when the IRS determines that the amount offered represents the most it can expect to collect within a reasonable timeframe, considering your ability to pay, income, expenses, and asset equity. To apply for an OIC, you usually need to be current with all required tax filings and estimated payments, and not be in an open bankruptcy proceeding. A non-refundable application fee of $205 typically applies, though it may be waived for low-income individuals.

For taxpayers experiencing severe financial hardship, the IRS may grant Currently Not Collectible (CNC) status. This status temporarily pauses active collection efforts, such as levies or liens, when the IRS determines you cannot pay your tax debt without causing financial hardship. While in CNC status, the debt does not disappear, and interest and penalties continue to accrue. The IRS periodically reviews your financial situation. To request CNC status, you typically need to provide detailed financial information to the IRS.