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If you owe taxes to the Internal Revenue Service (“IRS”), there is a significant chance that you have been flooded with a variety of harassing notices. It is often difficult to make sense of everything. What do you need to know about this process and the notices received? A brief explanation of the IRS collection process, from assessment, to the issuance of tax notices, to threatened (and actual) liens and levies, to how taxpayers can respond, is detailed below.
Once a tax return is filed, the IRS will assess a tax liability against the taxpayer. Assuming adequate withholdings or estimated payments were made, there will likely be no further communication with the IRS.
On the other hand, if the taxpayer has not paid all of the tax that is due, they may start receiving collection notices from the IRS reflecting additional tax owed. There could also be penalties for failure to pay taxes or make estimated payments. If a tax return was not timely filed, the IRS can impose additional penalties for the failure to file a tax return. If a tax return is not filed at all, you may also receive a CP59 notice. If nothing is done, the IRS may eventually assess tax based on a Substitute for Return (SFR) and you may receive a CP2566 notice. In many cases, an SFR will overstate the amount of tax that might otherwise be due. In all of these situations, the taxpayer will soon start receiving a bevy of letters requesting immediate payment and putting them on notice of forthcoming IRS collection activity.
Tax Collection Notices
Assuming the taxpayer does not have any basis to challenge the amount of the tax owed and does not have reasonable cause to abate penalties, the IRS will continue seeking to collect the remaining liability assessed. This will primarily be accomplished through periodic correspondence. Common letters from the IRS include the following:
- CP 14 Frequently the first collection notice received from the IRS. Informs taxpayers of a balance due, the applicability of interest and penalties, and how to request abatement of penalties.
- CP 71 This is a reminder notice from the IRS. Much like the CP14, it shows how the liability is calculated and also informs taxpayers of the ability to seek collection alternatives.
- CP 503 This is a “second” reminder notice from the IRS. The notice provides an explanation of what the IRS may do to collect the liability it is owed, including levying income or assets and filing a Notice of Federal Tax Lien.
- LT 14 A more advanced collection notice indicating that the IRS was unable to reach the taxpayer. If nothing is done, the IRS indicates that enforcement action may occur soon.
- LT 16 Indicates that the tax account has been assigned for enforcement. This means that the taxpayer has a limited amount of time before the IRS will seek to actively collect the tax through levies or liens.
While the IRS may take enforcement action in limited circumstances while collection notices (i.e., notices prior to levy notices) are being issued, for the most part these letters serve as reminders of the outstanding liability. The IRS usually affords taxpayers ample time to proactively address these issues before taking affirmative action. If nothing is done after receiving a number of these notices, notices regarding the intent to take enforced collection action will be issued.
Notices of Intent to Levy
Assuming a taxpayer has either not responded or not fully addressed the liability as a result of these collection notices, correspondence from the IRS will become more aggressive and will more immediately affect the rights of the taxpayer. It is important to keep in mind thatuntil all of the tax liabilities are paid in full, the IRS may have the ability to levy income or assets of the taxpayer. The IRS may also file a Notice of Federal Tax Lien (Form 668(y)(c)) and send a Letter 3172 (Notice of Federal Tax Lien Filing and Your Rights to a Hearing Under IRC 6320) around this time. Once notices of intent to levy are issued, it is particularly important to respond appropriately as appeal rights may be affected. In many instances where taxpayers are advised of their right to request a Collection Due Process (CDP) hearing, it is advisable to do so as this will prevent further collection action and can lead to an arrangement whereby tax liabilities can be addressed by taxpayers. Some, but certainly not all, of the letters involved in the levy process include:
- CP 88 This notice indicates that the IRS has withheld a refund because one or more tax returns have not been filed. Failure to address these issues can prevent taxpayers from negotiating a collection alternative and may result in levy or lien actions in the near future.
- CP 90 This notice indicates that taxes remain unpaid despite receipt of several prior notices from the IRS. The IRS will soon begin taking collection action through levies or liens. A taxpayer may request a CDP hearing in an attempt to resolve these liabilities.
- CP 91 This notice indicates that the IRS intends to levy up to 15% of your social security benefits to pay overdue liabilities. You may be able to request a CDP hearing in order to prevent this from occurring. Taxpayers can also proactively request an installment agreement or Offer in Compromise.
- CP 92 This notice indicates that the IRS has already levied a state tax refund and applied it to your overdue taxes. You have the right to a CDP hearing in order to contest the propriety of this action. In order to request a CDP hearing, you must complete a Form 12153 within 30 days. As described below, you may request a collection alternative (e.g., Offer in Compromise or installment agreement) during the CDP hearing.
- CP 504 This notice indicates that the tax liabilities remain unpaid and that the IRS has the ability to seize or levy any state income tax refunds. This is likely the last, or one of the last, notices received before the IRS will issue a Final Notice of Intent to Levy. The taxpayer should begin making plans to address overdue taxes or may soon be faced with imminent collection action.
- Letter 1058 This is a Final Notice of Intent to Levy and Notice of Your Right to a Hearing. Frequently, this will be the last latter received by a taxpayer before the IRS initiates enforced collection action through levies. If collection alternatives are not immediately sought or a CDP hearing is not requested within 30 days, the IRS may garnish wages, levy bank accounts, or seek collection from any of the taxpayer’s available assets.
Resolving Unpaid Tax Liabilities
The easiest way to resolve collection issues with the IRS is to pay the liabilities in full. Unfortunately, for most taxpayers, that is not possible. The IRS understands this and has established mechanisms to effectively work with taxpayers to collect these liabilities. Some of the mechanisms by which resolution is frequently possible include the following, some of which include “collection alternatives”:
- Collection Hold: While not a means to resolve outstanding liabilities, taxpayers frequently need additional time to assess the situation and make plans for repayment. Where requested, frequently the IRS will permit a temporary delay in enforced collection to accommodate taxpayers. This is discretionary and typically lasts for 30 to 90 days.
- Installment Agreement: This is frequently referred to as a payment plan. Depending upon a taxpayer’s disposable income and available assets, the IRS will allow taxpayers to pay tax liabilities over a period of time on a monthly basis. The term of an installment agreement varies based on the circumstances and may last up to 10 years. Streamlined and partial payment agreements (where less than the whole balance is paid) may be available in certain circumstances.
- Offer in Compromise: An Offer in Compromise (OIC) may be available if there is a “doubt as to collectibility,” a “doubt as to liability,” or if it promotes “effective tax administration.” Taxpayers may be able to settle liabilities with the IRS for less than the full amount due. For offers in involving collectibility, a compromise will require proof that a taxpayer is unable to pay and may require a lump sum up-front payment followed by monthly installments for a short period of time.
- Currently Not Collectible: This is another form of relief available for taxpayers that cannot currently pay liabilities, based on an IRS assessment of disposable income and assets. The IRS will not seek to levy income or assets where such a condition exists. Taxpayers may be forced to periodically update the IRS with their financial condition to remain in this status; otherwise, collection action may be renewed.
- Collection Due Process: Most times, before the IRS can enforce collection through levies, they are required to provide taxpayers with an opportunity for an administrative Collection Due Process (CDP) hearing pursuant to I.R.C. § 6330. During this hearing, taxpayers can present reasons why enforced collection is inappropriate and may offer to resolve liabilities through and installment agreement or Offer in Compromise. CDP hearings are requested using a Form 12153. Similarly, taxpayers can challenge the propriety of a recently filed Notice of Federal Tax Lien in the CDP context. The IRS is prohibited from taking certain collection actions while a CDP hearing is pending, pursuant to I.R.C. § 6320.
- Collection Appeals (CAP): This is an administrative procedure available to taxpayers where they contest certain collection decisions made by the IRS. During the pendency of any such appeal, the IRS will generally not take collection action.
- Bankruptcy: In certain contexts, filing for bankruptcy may prevent collection action by the IRS. An automatic stayprevents creditors, including the IRS, from seeking past liabilities during its pendency. Not all tax liabilities are dischargeable and careful consideration of other consequences must occur before this action is taken. There are also a number of prerequisites to having taxes discharged.
The proper resolution of outstanding liabilities with the IRS can be a time-intensive process requiring the compilation of detailed financial information. Successful resolution requires current compliance with tax laws and may require filing of previously unfiled tax returns. In addition, it may take months or years before collection alternatives are granted and appeals may be necessary. It is important for taxpayers to stay on top of any notifications and to be aware of how an improper response, or no response at all, can impair their rights and result on onerous enforcement activity.
Rosenberg Martin Greenberg, LLP has extensive experience in federal and state tax collection matters, including reaching tax settlements with the IRS, pursuing collection alternatives, addressing federal and state tax liens and preventing the levy of accounts, garnishment of wages and seizure of assets. We work with our clients to identify available collection alternatives, determine which alternative or combination of alternatives is best for their individual facts and circumstances, and assist in the execution of that strategy, ensuring that the client’s rights are protected along the way.
If you need assistance with a tax collection matter, please call Brandon N. Mourges at 410.951.1149 or email email@example.com.