We can all agree that we all have something in common – absolute dread when a letter from the Internal Revenue Service arrives. The letter generates significant concern for many people and actual anxiety on the other end of the spectrum.
Fortunately, many of the letters are not hard to clear up. However, they can be time-consuming and need a lot of perseverance and patience. “Why did I get an IRS letter?” you might wonder. “What should I do if I receive an IRS letter?”.
Don’t fret if you got a letter from the IRS because, in this blog post, we’ll go over what a collection letter is and how to follow up with the IRS if you get one. This report contains the following information:
- The IRS’s Collection Notices and Letters: Why, When, and How
- What is the Collections Process?
- How to Read and Understand Collection Notices
- How to React to Debt Collection Notices
- Your Options for Retaliation
Receiving a collection notice or letter from the IRS is often the first indication that a person or corporation has significant tax problems. Those who do not respond to these communications within a reasonable amount of time may suffer more significant penalties in the months and years ahead.
The IRS can recover back taxes and penalties in various ways, including garnishments of wages or tax refunds, punitive tax levies, liens on personal or corporate property, and asset seizure.
To prevent costly complications, you must know how to interpret and respond to collection notifications and letters. While every tax situation is different, the collecting procedure often follows a pattern. This eBook will give you vital information and tools to help you resist the IRS’s tax collection attempts on your own.
Why and when the IRS send notices and letters regarding tax collection?
The Internal Revenue Service (IRS) is a massive agency with a fearsome reputation, and the scope of its operations is enormous. To its credit, the agency makes no effort to hide this reality. According to IRS Tax Tip 2012-73 states, the IRS sends letters or notices to taxpayers each year. The reasons include;
- Problems with a taxpayer’s federal tax return or account.
- Payment demands on past-due tax balances
- Additional financial information, supplemental forms, or documentation is requested.
- Notifications of Account Status or Balance Changes
Additional information on the IRS collections process
IRS collection notices and letters fall into two categories: those with which the recipient agrees and those with which the recipient disagrees.
If you plan to fulfill a payment notice, follow the directions on the notification to settle your account. You do not need to respond if you receive an “account change” message that does not request immediate payment.
If you have not paid your taxes in full or owe back taxes from previous financial years, your notification will include a summary of your fines, outstanding balance fees, and interest. If you desire to contest the requested payment amount or the request itself, you must respond with a written account of your disagreement and keep all current and future correspondence. After you respond, the agency may take a month or longer to reply.
If you do not pay this payment by the deadline, the IRS will launch an increasingly aggressive collection campaign. If full payment is not achievable, you may be able to avoid collections activity by adopting the following steps:
- Establishing a monthly payment agreement
- Get a cash advance or a credit line to help you pay your payment.
- Bargain an Offer In Compromise (OIC)
- Paying a claim for financial hardship that restricts you from making any payments
All of these strategies, however, have substantial disadvantages. Consider the following example:
Financial hardship claims may prompt the IRS to place a lien on property you already possess or acquire after you file the claim. Most delinquent debtors face federal tax liens from the IRS. While there are ways to avoid tax liens entirely, ordinary people with jobs, families, and other financial concerns may find them difficult or impossible to implement on their own.
High-interest rates, complex fee structures, and other financial difficulties may be associated with credit card cash advances, payday loans, credit lines, and monthly payment agreements.
What are the most common collection notices and what do they mean?
The IRS sends out many collection notifications and letters in various formats. Some of the most common are;
CP 71C: Reminder of overdue taxes
A CP 71C notification typically applies to unpaid bills outstanding for several years and includes the following information:
- The original amount owed
- The tax year in which it was owed
- The amount of interest that has accrued on the balance
- The deadline by which the recipient must remit payment
CP 501/502: Notice of balance due
Your first notice of an overdue tax balance comes in the form of CP 501 Notice. It’s frequently sent before the IRS tries to recover money through liens, levies, garnishments, or other means. Suppose you do not acknowledge receipt of a CP 501 notification. In that case, IRS will send a CP 502 notice, which will inform you of extra interest and penalties owed on your account and encourage you to make an immediate full payment. This notice may come with supplementary documents such as:
- Notice 609 of the Privacy Act
- Account for your interest liability on a line-by-line basis.
CP 503: Second notice of balance due
This could be your last balance-due notice before the IRS resorts to more aggressive collection tactics. It usually gives you a 10-day window to pay off your past-due account balance.
CP 504: Final notice of balance due
A CP 504 notice usually precedes a formal Notification of Intent to Levy. It will summarize your back-tax liability, including additional interest costs, and notify you that the IRS intends to garnish your state tax refund. If you live in a state that does not have a personal income tax, your CP 504 letter may include a warning that the IRS may levy or lien additional assets or wages.
CP 521: Installment agreement payment due
This notice arrives after the back-tax installment payment deadline passes.
Like notices in the CP 50x series, CP 521 lists the past-due balance, including interest charges, and requests payments by a specific deadline. Your past-due credits will continue to collect interest once you get this notice. Other penalties may be imposed, such as outright canceling your installment agreement.
CP 523: Installment agreement default: notice of intent to levy
You will receive a CP 523 Notice if you are unable or unwilling to complete your installment payments on time. This notice will demand immediate repayment of your debt. If you do not acknowledge this notice, your installment arrangement might cancel, and IRS will impose liens, bank account levies, and wage garnishments. Even if you can escape cancellation, you may be charged a fee before being able to continue making payments.
CP 90/CP-297: Final notice of levy and notice of your right to a hearing
This is your final notification from the IRS that it intends to levy your assets, wages, or accounts. To avoid a levy, you must settle your outstanding debt within 30 days. If you cannot do so, the notification also includes information on how to request a Collection Due Process Hearing by filing Form 12153. While this procedure can help you avoid IRS levies, it is a time-consuming process that may not cure your underlying tax issue.
Letter 1058 (LT 11): Final notice/collection due process notice
This letter, like CP 90, acts as a final notice of an imminent levy. If the indicated balance is not paid in full, the imposition of such charges triggers. Furthermore, the letter expressly reserves the IRS’s ability to hunt for additional assets or sources of income to levy.
Letter 3172: notice of federal tax lien filing & your rights to a hearing under IRC 6320
Letter 3172 is a legal notice of a tax lien against your real and personal property. It gives the IRS the ability to confiscate the proceeds from selling any assets you own or acquire after the lien has been issued. It also safeguards the IRS’s ability to pursue your tax debt through all legal channels.
Tax liens issued by the federal government are not dischargeable in bankruptcy.
Letter 668D (LP 68): release of levy
This document serves as notice that the IRS has lifted an existing levy. IRS typically sends it to employers, banks, and other financial institutions obliged to turn over your financial assets or wages to the IRS. These organizations are urged, but not obligated, to inform you after receiving the notice. The IRS may issue LP 68 notices when the statute of limitations on collections activities has run out or when the IRS discovers that it made a mistake during the collection procedure.
If the IRS Wants to Meet With You
The IRS doesn’t just send collection notices. It sends all kinds of other correspondence. In 2023, the agency started sending out a new letter called a 725-B appointment letter. If you get this notice, it means that the IRS wants to meet with you. Note the deadline, contact a tax attorney for help if needed, and then, reply to the notice.
What to do when you get a notice
Even if the IRS makes a mistake when calculating your unpaid taxes or oversteps its bounds when levying or liening your assets, it might take years for the agency to fix the problem. Meanwhile, your credit score, job prospects, and personal relationships may suffer.
Remember the “golden rule” that has served past taxpayers well as you ponder your next move: it does not pay to panic. You don’t have to deal with the IRS alone, which could make things worse. Because the agency’s collection specialists get trained to extract damning statements from their targets, any attempt to cooperate could result in heavier sanctions and other unintended repercussions.
Taxpayers who receive IRS collection notices can, fortunately, seek outside assistance. In the section below, you will discover how to reply to a collection notice if you cannot pay it in full.
What happens if you can’t pay?
If you feel surprised by an IRS collection notice or letter, remember the quote from the IRS that we featured at the opening of this resource: “For several reasons, the IRS sends millions of letters and notices to taxpayers.”
The Internal Revenue Service (IRS) is a vast agency with a $12 billion annual budget. To keep and expand its operations, it needs to collect billions of dollars in taxes, interest, fines, and penalties from individual taxpayers like you. You aren’t the only one who the agency is after.
Because the IRS casts such a wide net, its agents are well aware that they will not be able to collect every dollar it asks. In truth, the IRS often accepts partial payments from delinquent taxpayers, known as Offers in Compromise. If you believe you feel unfairly targeted by the IRS or know you will be unable to pay the amount the agency has asked, there are numerous options available to you, including:
Filing an appeal– You have the right to dispute back-tax levies and asset seizures under the Due Process Clause of the United States Constitution and the IRS’s bylaws. Use IRS Form 12153 to request a Collection Due Process Hearing if the IRS garnishes your earnings or places a lien on your property. You can prepare for this hearing by doing the following:
- Collecting financial data to challenge the IRS’s assessment of your tax due
- Looking for proof that the liens or levies in question are illegitimate.
- Saving all IRS correspondences
Negotiating a payment arrangement- During the collecting process, you can work out an installment plan. The Internal Revenue Service (IRS) is eager to cooperate with taxpayers making a good-faith attempt to pay outstanding taxes. Make sure you’re ready for these negotiations by doing the following:
- Make a detailed record of your earnings and liquid assets.
- Give this figure to the IRS
- Come up with a fair payment that both parties can agree on.
- Make these payments on time to avoid additional fees, penalties, or interest.
Getting into the “not collectible” pool– By enrolling in the IRS’s “currently not receivable” pool, you can avoid making any back-tax payments for the time being. To do so, you must demonstrate that you:
- Are you poor or homeless?
- Have a life-threatening illness
- Are enduring severe hardships
You may “run out the clock” on your tax debt if your circumstances endure through the expiration of the statute of limitations on the IRS’s collection operations.
Negotiating an offer In compromise- If you can persuade the IRS that you will be unable to pay your tax burden promptly, it may decide to pursue an Offer in Compromise. An Offer in Compromise is a tax settlement that may only require you to pay a small portion of the original amount asked by the IRS. The process of establishing Offers in Compromise, on the other hand, is not comparable to a negotiation. Instead, it’s a complicated, time-consuming process that necessitates the help of a tax resolution expert.
Making a sound decision
While it is theoretically possible for the average taxpayer to battle or negotiate with the IRS on their own, it is frequently impracticable. At every stage of the procedure, an experienced, recognized tax resolution specialist can assist you by;
- Communicating with the IRS on your behalf
- Putting an end to frightening letters and other forms of harassment
- Giving you sound advice on your options
- Guiding you through the appeals process
- Preventing the exposure of embarrassing material
- Ensuring that the IRS does not overstep its legal bounds
Your future depends on successfully resolving your tax issues, and you deserve the best legal assistance available. Give us a call at 601-203-0950 for a free, no-obligation consultation if you have any concerns regarding the information on this site or find yourself in the middle of a tax dispute.
The collection process
IRS mails the billing notice which goes unpaid
A silent lien arises by statute, attaching to all the taxpayer’s assets owned and later acquired.
The IRS sends final notice of its intent to levy on the taxpayer’s income and assets, triggering a 30-day window for the taxpayer to request a collection due process hearing. This is a critical step to take.
Suppose the taxpayer owes more than $10,000. In that case, the IRS publishes a Notice of Federal Tax Lien in the public records, generating an avalanche of marketing letters from national IRS help firms and ruining the taxpayer’s credit score.
Suppose an appeal is not filed (about 3% of taxpayers do). In that case, the IRS begins seizing the taxpayer’s assets, including garnishing wages, clearing out bank accounts, and pursuing clients who may owe the taxpayer money.
Enforcing collection action will continue until the taxpayers decide to quit the “ostrich approach” of burying their heads in the sand regarding tax debt resolution and hiring a competent professional to sort out the problem.