Receiving a notice from the IRS can be stressful for all of us. Some notices are more severe than others, especially when it relates to an overdue tax debt.

If you’ve received IRS notice CP40, you will likely be well aware of the fact that you’ve got a debt to settle with the IRS. Being well-informed here is key, which is why you should read on if you’re trying to understand what a CP40 notice means, how to respond to it, and what to do if you’re feeling unsure about your next steps.

What is IRS Notice CP40?

IRS Notice CP40 is an important communication sent to taxpayers to inform them that their tax account has been assigned to a third-party collection agency for further action. It means that you’ll no longer be dealing directly with the IRS in relation to your tax debt.

This notice serves as a formal notification that the IRS has exhausted its efforts to collect unpaid taxes directly from the taxpayer and is opting to enlist the services of a collection agency to pursue the outstanding tax debt.

This notice will provide you with all of the relevant details related to your overdue tax account. It will also include a Taxpayer Authentication Number that you can refer to in order to verify the legitimacy of the collection agency when they contact you.

It’s crucial to take immediate action upon receiving an IRS CP40 Notice to avoid further complications with your tax obligations.

How to Respond to IRS CP40

First of all, it’s important to ensure that any letter you receive from the IRS is legitimate. There are many scams that involve sending fake IRS letters. Even if you are aware of an overdue tax bill, it’s still a good idea to check for signs that your letter is legitimate.

Once you’re sure your letter is genuine, it’s important to ensure you’re informed as to your rights. You should read Publication 4518 to learn more about what to expect when the IRS sends your account to collections, as well as Publication 1, outlining your rights as a taxpayer. Both documents can be found here. Or contact a tax attorney to be your advocate when dealing with the IRS or a collection agency.

It’s important to respond to your CP40 Notice as soon as possible, no matter what circumstances you’re in. Depending on your situation, your next steps could involve one of the following:

Pay Your Bill in Full

If possible, your ideal course of action is to pay your tax bill in full as soon as possible. This is the most straightforward way to resolve the issue and avoid any further stress or potential financial loss. 

Your CP40 notice will include instructions on how to make a payment, including online payment options, payment by mail, or through the collection agency now handling your account.

Request a Payment Plan

If paying the full amount upfront is not a feasible option for you, you can instead request a payment plan through the collection agency. Most collections agencies are willing to work with taxpayers to establish a monthly payment plan that fits within their budget. 

IRS payment plans are also available to some taxpayers with the IRS, but to set up payments with the IRS, you will need to request to have your account moved back from the collection agency.

Explore Other Options

There may be alternate options available when dealing with the collection agency assigned to your account, however, most will simply offer payment plans. Generally, if you want other options, you need to have your account transferred back to the IRS and apply directly through that agency.

When dealing with the IRS directly, some taxpayers may qualify for alternative options to resolve their tax debt, such as an Offer in Compromise (OIC) or Currently Not Collectible (CNC) status. 

These options allow taxpayers to settle their tax debt for less than the full amount owed (OIC) or temporarily suspend collection activities due to financial hardship (CNC). 

In any case, if you’re unsure about how to respond to your CP40 notice, it’s important not to let that keep you from addressing the issue. You can discuss your options with the collection agency, the IRS, or seek assistance from a tax professional to determine the best course of action.

What Happens if I Ignore IRS CP40 Notice?

Ignoring an IRS CP40 Notice can lead to serious consequences. While each case is unique, there are several common potential outcomes that can result from ignoring this communication.

Increased Penalties and Interest Charges

First of all, ignoring a CP40 notice may result in additional penalties and interest charges being assessed on your outstanding tax debt. These charges can accumulate over time, and so the longer you wait to resolve the issue, the more costly it will be to eventually fix the problem. 

If you receive a CP40 from the IRS, your account is already long overdue. Ignoring things even further at this stage could be extremely costly.

Aggressive Collection Actions

Dealing with debt collection agencies can be stressful. Although collection agencies contracted by the IRS are only, in theory, supposed to offer payment options or payment plans, in practice things can be different. If you ignore a CP40 notice, the collection agency handling your account may escalate their collection efforts. 

This could include regular contact by phone and/or mail, but in theory that is as far as things should go. According to the IRS, a collection agency cannot engage in any enforcement action against you to collect your debt.

Damage to Personal Finances

Unresolved tax debt can have a negative impact on your personal finances. Tax debt does not appear on your credit report, but if the IRS issues a lien, it will be a public record. Once liens are in place, you may not be able to qualify for a loan or new line of credit until your debts are resolved. 

By engaging with the collection agency and exploring options to resolve your tax debt, you can work towards resolving the issue and avoiding further negative outcomes. Remember, you don’t have to be ready to pay off the debt in order to contact collections and start improving your situation. 

What’s the Difference Between Collections & IRS?

The Internal Revenue Service (IRS) is the federal agency responsible for administering and enforcing tax laws, including the collection of taxes, processing tax returns, and ensuring compliance. 

Collections, on the other hand, refer to recovering unpaid taxes and resolving outstanding tax debts. Collection agencies are private organizations, and the IRS is permitted by law to work with a small number of approved agencies in order to outsource collection activities. 

The collections process involves contacting taxpayers to request payment and setting up payment plans. The IRS states that private collection agencies cannot take any kind of enforcement action, such as issuing a levy or tax lien.

However, it is possible that if you cannot work out a payment plan with collections that your account will be passed back to the IRS. If that happens, continued non-compliance with your tax obligations may result in the IRS taking further enforcement action against you. This could involve garnishing your wages or seizing your assets to satisfy the debt. 

In summary, collection agencies simply work to establish some kind of payment arrangement with delinquent tax accounts, while the IRS has the ability to do the same as well as issue more severe enforcement actions.

When & How to Get Debt Out of Collections

If you don’t want to work with a private collection agency (PCA) in order to settle your tax debt, you must submit this request in writing to the agency in question. You should be prepared to explain your reasoning and outline why exactly you would prefer to have your account returned to the IRS.

Depending on the nature of your delinquent tax account, it may be a good idea to try and get it moved out of collections and back to the IRS.

Difficulty with Collection Agency

If you’re having difficulty communicating with the collection agency, or if you’re unable to negotiate a payment plan or settlement that fits within your financial abilities, it may be worth exploring the option of returning your account to the IRS.

More Suitable Terms with IRS

Depending on your situation, the IRS may offer more flexible payment options, such as an Offer in Compromise or Currently Not Collectible status, that the collection agency cannot offer. If you believe that you may qualify for one of these options, it may be worth having your account moved back to the IRS to explore your options.

When is it Better to Work with Collections Instead?

In some cases, it can make more sense to keep your account in collections rather than moving it back to the IRS. For instance, if your account is in collections (i.e., you’ve received a CP40 notice) and you want to resolve your debt as quickly as possible, it may be better to simply pay it off with the collections agencies. 

If you’re looking to resolve your debt before taking out a loan or mortgage, for example, and you need time to rebuild your credit, this could be the better option. That’s because having your account moved to the IRS could lead to delays if the IRS doesn’t currently have the resources to deal with your case.

It may also be worth considering your debt’s collection statute. The IRS generally has ten years to collect a tax debt. If your debt is approaching its Collection Statute Expiry Date (CSED), then it could be in your interest to keep the debt with collections rather than have it returned to the IRS, which will likely increase collection actions before the statute runs down.

Contact Damien’s Law for Help Today

Whether you’re dealing with the IRS or a third-party collection agency, you may want to seek professional help. At Damien’s Law, we specialize in tax problems and delinquent tax bills. We can help you assess the options and choose the best resolution for your situation. To get help now, contact us today.