The IRS is responsible for collecting taxes owed to the United States government. When taxpayers fail to pay their taxes on time, the IRS initiates a collections process to recover the outstanding debt. This process can be complex and intimidating for those unfamiliar with it. Understanding how the IRS collections process works can help taxpayers navigate their obligations and avoid potential consequences.
Assessment of Taxes
The IRS begins by assessing the amount of tax you owe. This assessment can occur through various means. For example, if you file a tax return reporting income and deductions, or if the IRS conducts an audit to determine the correct amount owed. Once the tax liability is determined, the IRS will send you a notice detailing the amount owed, including any penalties and interest that may have accrued. At this point, the collections process has begun, and it will only end when one of two things happens. The tax bill needs to be paid or settled, or the statute of limitations needs to run out.
IRS Notice and Demand for Payment
After assessing the tax liability, the IRS sends a Notice and Demand for Payment. This notice outlines the amount owed and provides instructions on how to pay. It is important for you to respond promptly to this IRS notice to avoid further collection action by the IRS. Keep in mind that interest will accrue until the tax balance is paid in full. The current rate is 8% per year, compounded daily. Unfortunately, those who do not pay their tax bills will also need to deal with the failure to pay penalty. This is 0.5% for each month, or partial month, that the tax goes unpaid. The penalty can cost up to 25% of the total amount owed.
Payment Options
The IRS also accepts various forms of payment, including electronic funds transfer, credit card, check, or money order. You can pay the full amount owed in a lump sum. If paying in full is not possible, there are options for tax relief.
Installment Agreements
An IRS installment agreement is a formal arrangement between a taxpayer and the IRS to pay off a tax liability over time. With a short-term installment agreement, you will need to pay your full tax bill within 180 days. This option is available to those who owe less than $100,000 in combined tax, penalties and interest. With a long-term installment agreement, you can pay your full tax bill in over 180 days. This option is available to those who owe less than $50,000 in combined tax, penalties and interest.
Offer in Compromise
An Offer in Compromise (OIC) is a program offered by the IRS that allows taxpayers to settle their tax debt for less than the full amount owed. It’s a viable option for individuals or businesses who are unable to pay their tax liability in full or would suffer undue financial hardship if forced to do so. It’s important to understand that the chances of the IRS accepting an OIC is not high. This form of tax relief is reserved for taxpayers who have suffered severe, long-term financial troubles, making it impossible for you to pay your tax bill.
Currently Not Collectible Status
Currently Not Collectible (CNC) status, also known as hardship status, is a designation used by the IRS for taxpayers who are experiencing significant financial hardship and are unable to pay their tax debt. When a taxpayer is granted CNC status, the IRS temporarily suspends collection activities, such as liens, levies, and garnishments, until the taxpayer’s financial situation improves.
IRS Notice of Federal Tax Lien
Once the tax debt remains unpaid, the IRS files a Notice of Federal Tax Lien. Filing the NFTL makes your unpaid tax debt public and establishes the IRS’s legal claim to your property. The IRS will also send you a copy of the notice. A federal tax lien will make it very difficult for you to sell or transfer property without satisfying the IRS’s claim. Furthermore, the lien may affect your credit score and ability to obtain loans or credit.
To release the Notice of Federal Tax Lien, you must satisfy the tax debt in full, either by paying the amount owed, entering into an installment agreement with the IRS, or settling the debt through an Offer in Compromise. Once the tax debt is paid or otherwise resolved, the IRS will issue a Certificate of Release of Federal Tax Lien within 30 days. This removes the lien from your property and releases the IRS’s claim.
IRS Final Notice of Intent to Levy
If you still make no effort to pay your taxes, the IRS will issue a Final Notice of Intent to Levy. This notice typically comes 30 days before the levy is initiated. When the IRS levies, it means they seize your property to satisfy a tax debt. Levies can take various forms, including seizing wages, bank accounts, vehicles, real estate, retirement accounts, or other assets.
You have the right to appeal a levy action by requesting a Collection Due Process (CDP) hearing with the IRS Office of Appeals. During the CDP hearing, you can dispute the validity of the tax debt, propose alternative collection options, or present evidence of financial hardship or other extenuating circumstances. The IRS may release a levy if you apply for a payment arrangement, demonstrate financial hardship, or present an Offer in Compromise. Once the IRS releases the levy, you regain control of your assets, and the IRS stops collection actions related to those assets.
Legal Action
In extreme cases, the IRS may take legal action against delinquent taxpayers to enforce collection of unpaid taxes. This can involve filing a lawsuit in federal court to obtain a judgment against the taxpayer or pursuing criminal charges for tax evasion or fraud. Legal action should be avoided whenever possible, as it can result in significant financial penalties and even imprisonment.
Tax Help for Those in IRS Collections
The IRS collections process is a complex and multifaceted system designed to ensure compliance with the tax laws. While dealing with tax debt can be stressful and intimidating, understanding how the process works can help you navigate their obligations and avoid serious consequences. By responding promptly to notices from the IRS and exploring payment options, taxpayers can resolve their tax issues and move forward with peace of mind. When in doubt, seeking the help of a credible tax professional is a good option. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
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