IRS CP501: Reminder of Balance Due – Meanings & Actions Needed
If you owe a balance to the IRS, you will receive this notice. Generally, the IRS sends this notice after sending you a CP14. The IRS paused many of these notices during the Covid pandemic, and they had most on hold for over a year due to short staffing. As of November 2023, the IRS has resumed sending these notices to taxpayers. The CP501 is a relatively straightforward notice letting you know that you need to pay your outstanding income tax bill. The letter tells you how much you owe, the due date for payment, and what can happen if you don’t pay. To get a sense of what the CP501 looks like, take a look at this sample. Then, keep reading to see what you should do with this notice.
What Does Notice CP501 Mean?
When you receive Notice CP501, it merely means that you owe tax from a previous tax year. Typically, the IRS sends this notice to remind you to pay your taxes, but in some cases, the IRS issues this notice even if you are not expected to pay your taxes immediately. If you receive a CP501 notice and any of the following are correct, you can disregard it:
- You have paid your balance in full in the last 21 days.
- You are already making payments on that tax amount through an installment agreement.
- The IRS issued you currently not collectible (CNC) status, and they notified you that the agency was suspending collection activity because it would create a financial hardship for you.
- You are in the midst of filing bankruptcy, and a stay has been issued to your creditors.
Every year your income tax payment for the previous year is due on April 15th or the following business day. If you don’t make your payment by that deadline, you face interest and penalties on your balance, and this notice is one of the first that you may receive.
What Should You Do If You Receive CP501?
If you can afford to pay the entire balance, merely detach the payment stub, write a check or money order to the United States Treasury, and mail the payment to the address on the notice. Make sure to put your social security number, the tax year, and the tax form you filed on the check. You can also pay online. The new notices for CP501, which started going out in November 2023, now have a QR code that you can scan and make a payment right from your phone. If you disagree with the information on the notice, contact the IRS directly at the number provided on the form. When you speak to an IRS agent, they will let you know your options regarding the balance. Contact a tax resolution specialist to help you if you want assistance in dealing with the IRS.
If you ignore this notice, the IRS will generally send a CP503 notice about six weeks later. It is important to take action on these notices to prevent future penalties and interest from adding up.
What Happens If You Can’t Pay Your Taxes?
Generally, payment is due within 21 days of receiving the notice, but if your balance is over $100,000, it is due within ten days. If you don’t pay, the IRS will continue to assess interest and the failure to pay penalty on your account. The penalty is 1/2% of your total balance every month, up to a total of 25% of the balance. For instance, if you owe $10,000, the monthly penalty is $50, and the IRS can add penalties worth up to $2,500. Interest accrues on top of these penalties.
With this notice, the IRS also lets you know that they may issue a federal tax lien against you. A tax lien is an official notice that the IRS has a claim to your assets. Usually, it appears on your credit report, which can make it very difficult to obtain loans, but as of 2018, all three major credit bureaus (Experian, TransUnion, and Equifax) have removed all consumer tax liens. As a result of that shift, tax liens may not be as disruptive as they once were.
That said, if you ignore this notice, the IRS may send another letter about levying your assets. Failure to respond to that notice can result in the IRS seizing your wages, bank accounts, or other assets. Additionally, once the IRS sends that notice, your failure-to-pay penalty can increase to 1% of your balance per month. For instance, if you owe $10,000, your monthly penalty rises to $100. To avoid penalties, try to make arrangements with the IRS. In special situations, the IRS may even remove penalties, and this notice also details the steps you can take to apply for penalty abatement.
What If You Can’t Pay the IRS in Full?
If you can’t pay the balance in full, contact the IRS immediately to discuss other options. Here are some standard options:
- IRS Installment Agreement: An installment agreement lets you pay off your taxes in manageable monthly payments. There are a few different types of installment agreements, and you need to choose the right one for your financial situation.
- IRS Hardship: If you can prove that paying the tax would cause financial hardship, the IRS will put a temporary stop to all collection activity. This agreement is called an IRS hardship, uncollectible, currently not collectible (CNC), or status 53. Mostly, you have to show the IRS that you can’t afford to cover the tax owed and your essential living expenses.
- Offer in Compromise: With an offer in compromise, you settle the taxes owed for less than the total balance. You have to meet strict income requirements to qualify for this arrangement.
Note that even if you make a payment arrangement, interest will continue to build upon the balance until it is paid in full. If you want to minimize the final costs, you should take action as soon as possible. To get help, reach out to a tax professional on our site that has IRS experience. You can find them here.