What Happens When the IRS Sends You to Collections?

The Internal Revenue Service (IRS) follows a structured process to address unpaid tax obligations. This process begins with various notices and can escalate to enforcement actions if the debt remains unresolved. This article clarifies the IRS collection process, offering insights into the typical sequence of events and available resolution avenues. Understanding these procedures helps taxpayers navigate their situation and make informed decisions.

The Initial Collection Process: Notices and Communication

When a tax liability remains unpaid, the IRS initiates collection efforts by sending a series of notices through the mail. These notices serve as formal demands for payment and progressively escalate, warning of potential collection actions. The first communication often comes in the form of a CP14 notice, informing the taxpayer of an unpaid balance, including penalties and interest, and requesting payment.

If the balance remains outstanding, the IRS sends additional notices in the CP500 series. These notices become progressively firmer, sometimes mentioning a federal tax lien or warning of collection actions like the seizure of state tax refunds.

The most significant communication before aggressive enforcement actions is Letter 1058 or LT11, known as the Final Notice of Intent to Levy and Notice of Your Right to a Hearing. This notice is a legal prerequisite for the IRS to proceed with certain collection actions, such as levying wages or bank accounts. It informs the taxpayer of their right to a Collection Due Process (CDP) hearing, which allows them to challenge the intended levy and explore resolution options. Immediate action is advised to prevent further escalation.

Taxpayer Options for Addressing Unpaid Taxes

Taxpayers facing unpaid tax liabilities have several avenues to explore for resolution. Understanding these options is crucial for developing a strategy to address the debt.

Installment Agreement (IA)

An Installment Agreement (IA) allows taxpayers to make monthly payments over an extended period to pay off their tax debt. To qualify, individuals generally need to owe $50,000 or less in combined tax, penalties, and interest, and must have filed all required tax returns. While interest and penalties continue to accrue, an IA can prevent more aggressive collection actions. Taxpayers may need to demonstrate financial hardship to establish their ability to make consistent payments.

Offer in Compromise (OIC)

An Offer in Compromise (OIC) permits taxpayers to settle their tax debt for a lower amount than originally owed. The IRS may accept an OIC based on doubt as to collectibility, doubt as to liability, or effective tax administration. Doubt as to collectibility is the most common reason, indicating that the taxpayer’s assets and income are less than the full tax liability. Pursuing an OIC requires extensive financial disclosure to determine the taxpayer’s ability to pay.

Currently Not Collectible (CNC)

Currently Not Collectible (CNC) status offers a temporary suspension of IRS collection efforts for taxpayers experiencing significant financial hardship. To qualify, a taxpayer must demonstrate that paying the tax debt would prevent them from meeting basic living expenses. The IRS requires detailed financial information to assess income, expenses, and available assets. While in CNC status, the debt remains, and interest and penalties continue to accrue, but active collection efforts are paused.

Collection Due Process (CDP) Hearing

Taxpayers have the right to a Collection Due Process (CDP) hearing, which provides an opportunity to challenge a proposed levy or a filed tax lien. This hearing occurs before an independent IRS Appeals Officer, allowing the taxpayer to discuss collection alternatives or dispute the amount owed. To request a CDP hearing, taxpayers must file within 30 days of receiving a Final Notice of Intent to Levy or a Notice of Federal Tax Lien Filing. Filing this request suspends most IRS collection actions during the hearing process.

Partial Payment Installment Agreement (PPIA)

A Partial Payment Installment Agreement (PPIA) is a variation of an IA for taxpayers who can make some payments but cannot fully pay their debt by the collection statute expiration date. Under a PPIA, monthly payments are based on the taxpayer’s ability to pay, with the understanding that the full debt may not be repaid before the IRS’s collection period expires. This option requires detailed financial information to prove the taxpayer cannot afford the full amount. The IRS periodically reviews the taxpayer’s financial situation while a PPIA is in effect.

IRS Enforcement Actions

If taxpayers do not respond to IRS notices or resolve their tax debt, the IRS can take assertive actions to collect the outstanding amount. These enforcement actions can significantly impact a taxpayer’s financial standing. The IRS provides notice before initiating these measures.

Federal Tax Lien

A Federal Tax Lien is a legal claim the IRS places against a taxpayer’s property, including real estate and vehicles, to secure the payment of a tax debt. This lien arises automatically when a tax assessment is made and demand for payment is issued, becoming public record when the IRS files a Notice of Federal Tax Lien. The filing of a federal tax lien can negatively affect a taxpayer’s credit score, make it difficult to sell property, and impact future financial transactions. It establishes the government’s priority claim over other creditors for the taxpayer’s assets.

Levy

A Levy is the legal seizure of a taxpayer’s property or rights to property to satisfy a tax debt. Unlike a lien, which is a claim, a levy actually takes the property. The IRS must send a Final Notice of Intent to Levy at least 30 days before initiating a levy, providing the taxpayer with a right to a hearing.

Wage Levy

A wage levy, also known as garnishment, directs an employer to withhold a portion of an employee’s wages and send it directly to the IRS until the tax debt is satisfied. The amount taken is determined by the taxpayer’s filing status and number of dependents. Employers are legally obligated to comply with the levy, which can significantly reduce a taxpayer’s take-home pay.

Bank Account Levy

A bank account levy allows the IRS to seize funds held in a taxpayer’s bank accounts. When a bank receives a levy notice, it places a 21-day hold on the account, during which the taxpayer cannot access the funds. If unresolved, the bank transfers the funds directly to the IRS. This can apply to individual and joint accounts.

Property Levy

For tangible assets like real estate or vehicles, the IRS can pursue a property levy. This process involves seizing and selling the asset to satisfy the tax debt. The IRS must follow specific procedures, including providing notice, before seizing and selling property. Proceeds from the sale are applied to the outstanding tax liability, with any excess returned to the taxpayer.