How IRS Tax Collections Work

When taxpayers are unable to pay their taxes on time fully, the IRS offers them several options. It is not the mission of the IRS to torture you. They would like to get what money they can and move on.  However, if delinquent taxpayers fail to respond to IRS notices, they soon find that the IRS hasn’t forgotten them. The IRS has enormous power and ignoring their tax notices could cost you your property and some of your wages. It’s best to face your tax problems head-on. You can deal with the IRS and maybe even come out ahead if you understand how IRS tax collections work.

First IRS Notice Demands Payment

The first notice you receive from the IRS (generally CP 14) when you are delinquent will demand payment of the amount you owe plus any interest and penalties. Along with the IRS notice, you should receive a copy of Publication 594, The IRS Collection Process. If it’s possible for you to pay your overdue taxes, it’s best to do so as soon as possible. Doing so will limit accrued interest and penalties. You may even consider a loan to pay off the taxes. Interest accrues from the payment due date with monthly late payment penalties added on as well.

What to Do if You Cannot Pay Off Your IRS Taxes

If you cannot immediately pay all your taxes to the IRS after receiving a demand notice, you have other options. Collection action stops (at least for now) once you reach one of these agreements with the IRS (not exhaustive).

• Installment Agreement: If you can’t get a loan to pay off your taxes, but you can afford monthly payments, an installment agreement is probably the first option to consider.
• Offer in Compromise: An offer in compromise is a proposal to the IRS to pay less than the full amount you owe. They may accept your offer in compromise if they do not believe they can get any more money from you. It is an excellent option if you qualify, but the IRS approves only about 40% of submitted offers in compromise. There are particular requirements and every line on the application must be completed correctly. Read our article IRS Offer in Compromise Qualifications & Eligibility Requirements, and if you think you might qualify, you will want to seek the assistance of a seasoned tax professional.
• Delayed Collection: If you are in no position to pay even monthly installments due to financial hardship, you can request the IRS to delay collection and report your account as currently not collectible. Penalties and interest continue to accrue until you pay off the taxes or until the statute of collections expires for that specific tax period.

What Happens If You Ignore Initial IRS Notices

Should you ignore the notices sent by the IRS, they may take one or more of the following actions to collect.

• Federal Tax Lien: A federal tax lien is a legal claim to your property. It not only includes your current property but any property you acquire after the lien. If you do not pay the IRS within ten days after they send the first notice demanding payment, a federal tax lien goes into place automatically.
• Public Notice of Federal Tax Lien: The IRS may also file a Notice of Federal Tax Lien in the public records. The purpose of this is to notify your creditors that there is a federal tax lien against your property.  A lien generally will not be released until taxes have been paid in full. 
• Levy: A tax levy is an actual seizure of your property. It may include wages (wage garnishment), bank accounts, retirement income, and even social security benefits. It also may consist of real estate and other property such as your car. Some property is exempt. Before the IRS seizes your property, they will send you a notice. If you don’t pay, come to an agreement or request a hearing on the matter within 30 days, they may seize your property.
• Notice of Intent to Offset: If you owe the IRS, they may take taxes owed from tax refunds. That includes IRS or state tax refunds.
• Summons: You or a third party may receive a legal summons to testify or to provide the IRS with information or documents.
• Passport Revocation: If you are very delinquent in your IRS taxes, the State Department may revoke your passport or refuse to renew it.

Who Handles Your Delinquent IRS Account

Should you ignore your first IRS notice, the IRS will turn over your case to either the Automated Collection System (ACS) or an IRS Revenue Officer. Usually, the account will first be handled by the ACS. However, if the tax owed is significant or the case has complexity, the IRS may assign a local revenue officer. If you receive Form 9297 (Summary of Taxpayer Contact), that means your account has been assigned to a revenue officer. 

If the IRS assigns your case to ACS, there is no dedicated person assigned to your account. The ACS is comprised of IRS call centers that primarily respond to incoming calls from taxpayers who received computer-generated notices. For example, notices such as

• CP 14 – Notice of Unpaid Taxes
• CP 501: Notice of a Balance Due
• CP 503: Second Reminder
• CP 504: Intent to Levy on Certain Assets

Before the IRS sends out levies, you will get CP90/CP297/LT 1058 (Final Notice of Intent to Levy and Notice of Your Right to a Hearing) and/or CP91/CP298 (Final Notice Before Your Social Security Gets Levied). 

Though the ACS can levy your wages and your bank account, if your delinquent account reaches the point that the IRS is ready to seize your house, your business equipment or your property, an IRS Revenue Officer will be assigned. Once the IRS assigns a revenue officer, you will deal only with that officer. You may not use the ACS.

Sometimes your case may be assigned to one of the four private collection agencies that are collecting for the IRS. These private agencies are usually assigned to older accounts where taxes have been overdue for quite some time. There are some concerns about the IRS unleashing private collection agencies on taxpayers. However, you have some recourse if you find it difficult to deal with them.

What if an IRS Special Agent Contacts me?

Special agents who work for the Internal Revenue Service (IRS) are responsible for investigating potential criminal activity related to tax laws. If you are under criminal investigation by an IRS special agent, the agent has reason to believe that you may have violated federal tax laws. The agent will likely gather evidence and interview witnesses to determine whether or not to recommend that you be charged with a crime. If you are convicted of a tax crime, you could face significant penalties, including jail time. It is essential to take any criminal investigation by an IRS special agent seriously and consult with an experienced attorney who can help you protect your rights.

Consider a CDP Hearing if You Aren’t Getting Anywhere

If you cannot seem to resolve things with the ACS and don’t want to deal with a revenue officer (if the ACS will even agree to transfer you), you could file a Request for a Collection Due Process (CDP) hearing after receiving a notice proposing a levy,  a Notice of Levy, or a Notice of Federal Tax Lien. Doing so has the added benefit of immediately stopping all collection activity. Once you request a CDP hearing your case moves to the IRS Office of Appeals, where you can negotiate with a Settlement Officer. Although nothing in life is guaranteed, it’s highly likely that dealing with a Settlement Officer is going to be more comfortable and more beneficial to you than dealing with the ACS.

IRS Collections on Unfiled Tax Returns

What if you never file a tax return? Then, can the IRS collect what you owe? Yes, the agency has processes to go after taxpayers with unfiled returns, and in some cases, this situation may even be worse than if you're dealing with unpaid taxes on a filed return.

Once you file a tax return, the IRS has three years (six in cases of fraud or significant understatement of your income) to review the return and assess additional tax. If you don't file, the time clock that ends on the assessment statute expiration date never starts ticking. In other words, if the IRS decides to look into the matter, they can go back an unlimited amount of time.

The IRS can use a substitute for return to calculate your tax due. Then, they send a Notice of Deficiency, and depending on how you respond, this leads to a tax assessment, and then, the IRS can start the collection process. The penalties for unfiled returns are also much higher than they are if you file but don't pay.

IRS Tax Help Is Available

If the IRS has sent you a collection notice, it is critical that you act quickly. If you throw the notice into a drawer, the IRS will come after you. At some point in their collection procedure, there will be no more room for negotiation. If you are not sure what to do about your IRS tax collection problem, speak to one of the tax professionals in our network. Start your search for the most qualified professional to help you with your unique IRS and/or State tax problem.