IRS Tax Topic 201: The Collection Process

The Internal Revenue Service (IRS) collection process is the formal, legally guided procedure used to collect unpaid taxes after a liability has been assessed. This system follows a defined sequence that respects taxpayer rights while ensuring compliance with federal tax laws. The process is initiated through written communication, giving taxpayers notice of their debt and an opportunity to resolve it.

The Initial Bill and Follow-Up Notices

The IRS collection process begins after a tax liability is assessed and the taxpayer has not paid the amount due in full. The first step is the mailing of a bill, which is a formal demand for payment. This initial communication is the CP14, Notice of Tax Due and Demand for Payment, which states the amount of tax owed, includes any accrued penalties and interest, and provides a payment deadline.

If the taxpayer does not respond to the initial bill, the IRS sends a series of automated reminder notices. The first reminder is the CP501, sent about ten weeks after the CP14, reiterating the balance due and the continued accrual of penalties and interest. Should the debt remain unpaid, the next notice is the CP503, a more strongly worded reminder that immediate action is required. Following the CP503, the IRS may send a CP504, which warns of the intent to levy certain assets, such as state tax refunds.

Understanding Federal Tax Liens and Levies

When initial notices are ignored and a tax debt remains unpaid, the IRS can employ a federal tax lien and a levy. A federal tax lien is a legal claim the government establishes against a taxpayer’s property to secure its interest in a tax debt. This claim applies to all of a taxpayer’s assets, including real estate, personal property, and financial accounts. The IRS formalizes this claim by filing a public document called a Notice of Federal Tax Lien, which alerts other creditors that the government has a right to the property and can negatively impact a person’s ability to obtain credit.

A tax levy is distinctly different from a lien; it is the actual seizure of property to satisfy the tax debt. While a lien secures the government’s interest in your property, a levy takes the property. Before the IRS can levy property, it is legally required to send a final warning. This communication is Letter 1058 or LT11, titled “Final Notice of Intent to Levy and Notice of Your Right to a Hearing.” This notice informs the taxpayer that the IRS intends to begin seizing assets and that the taxpayer has 30 days to request a formal hearing to appeal the collection action.

The IRS Seizure Process

Once the 30-day period granted by the “Final Notice of Intent to Levy” expires without a response from the taxpayer, the IRS is legally authorized to begin the seizure process. This action, known as a levy, is the forcible taking of assets to cover an outstanding tax liability. One of the most common forms of levy is a wage garnishment, which is a continuous levy where the IRS requires an employer to withhold a portion of an employee’s wages from each paycheck.

The amount withheld is determined by a formula that considers filing status and number of dependents. Another frequent action is a levy on a bank account, which is a one-time seizure. The IRS sends a notice to the financial institution, which must then freeze the taxpayer’s account for 21 days. This holding period allows the taxpayer a final opportunity to resolve the debt before the bank sends the funds to the government. The IRS can also seize other property, such as vehicles or real estate, to be sold at public auction.

Taxpayer Resolution Options

Taxpayers who cannot pay their tax debt in full have several formal options to resolve the liability. An Installment Agreement is a structured monthly payment plan with the IRS. For taxpayers who owe a combined total of $50,000 or less, the IRS offers a Simple Installment Agreement for up to 120 months, which can often be set up online. For larger debts, the IRS may require detailed financial information via Form 433-F, Collection Information Statement.

An Offer in Compromise (OIC) is an agreement that allows a qualified individual to settle their tax debt for a lower amount than what they originally owed. This option is for situations where there is doubt the tax can be collected in full. To apply, the taxpayer must submit Form 656, Offer in Compromise, along with financial statements on Form 433-A (OIC) and pay a $205 non-refundable application fee, unless they meet low-income guidelines.

Currently Not Collectible (CNC) status is a temporary suspension of collection efforts for taxpayers who can demonstrate they cannot afford basic living expenses and tax payments. To qualify, the IRS analyzes the taxpayer’s income and allowable expenses. CNC status does not eliminate the tax debt, and penalties and interest continue to accrue while the IRS periodically reviews the taxpayer’s financial situation.

The Collection Due Process Hearing

Taxpayers have a formal right to appeal a proposed collection action by requesting a Collection Due Process (CDP) hearing. The opportunity to request this hearing is triggered by the “Final Notice of Intent to Levy” or the “Notice of Federal Tax Lien Filing,” which gives the taxpayer 30 days to file the request. To formally request the hearing, the taxpayer must mail Form 12153, Request for a Collection Due Process or Equivalent Hearing.

Filing this form on time legally prevents the IRS from proceeding with most levy actions while the appeal is pending. The CDP hearing is conducted by an impartial officer from the IRS Office of Appeals who has had no prior involvement with the case. During the hearing, the taxpayer can challenge the appropriateness of the collection action and propose less intrusive alternatives, such as an installment agreement or an Offer in Compromise. After the hearing, the Office of Appeals will issue a final Notice of Determination.