It’s not a pleasant thing to think about owing money to the IRS. And even if you manage to remove that stressful thought out of your mind, the IRS will do everything it can to remind you of your unpaid taxes. 

The IRS isn’t trying to be mean (although it can sometimes feel that way). Instead, the agency sends out multiple collection notices to see if they can convince you to pay your back taxes before they have to resort to more drastic collection steps such as seizing your assets. 

One of the most common collection notices the IRS sends out is the CP501 Notice. Let’s take a closer look at this notice, including what it means, what you should do if you receive this notice, and what happens if you ignore it. 

What Is an IRS CP501 Notice? 

Sometimes referred to as a 1st Notice, the CP501 is a letter the IRS sends out telling you that you owe them money for unpaid taxes. The notice will usually itemize the total unpaid tax debt, including any penalties and interest that are included in that amount. 

Here’s an example of what the CP501 Notice will typically look like if you get one in the mail. Even though the CP501 Notice is sometimes called the 1st Notice, you might receive it after the IRS sends you a CP14 Notice. How you respond to CP501 depends on whether or not you agree with it.

If You Agree with IRS CP501 

In this situation, you need to find a way to pay your tax bill. If you have the money to do so, you can pay the entire tax balance immediately. There are several options for sending a payment to the IRS, such as:

• Mailing a check or money order.
• Electronically sending payment with the IRS2Go Mobile App, the Electronic Federal Tax Payment System, Direct Pay, Debit Card, Credit Card, or Digital Wallet.

If you can’t pay the entire balance immediately, you may use a payment plan or installment agreement to make partial payments each month. If paying over time isn’t possible, you may be eligible for other forms of tax settlement, including an offer in compromise or currently not collectible. 

If You Disagree with IRS CP501 

If you disagree with any part of the CP501 Notice, call the toll-free number on the notice to explain your disagreement to the IRS. If the IRS employee you speak with can’t resolve the disagreement, then you can usually ask to discuss the issue with the employee’s supervisor. If the matter is still unresolved, there will be another process in place. 

Depending on your unique tax situation, this could include Fast Track Settlement or an administrative appeal. If you only disagree with the tax penalty, there are several penalty relief options available. 

What Happens If You Ignore CP501 

If you ignore your CP501 Notice from the IRS, you’ll get more notices and letters. One such document could be the CP503 Notice. It’s similar to CP501 in that it informs you of an unpaid tax balance, but unlike the CP501, it places a greater emphasis on warning you of the serious consequences of not resolving your tax matter with the IRS.

At a minimum, ignoring CO501 will probably result in a larger tax bill due to increased penalties and interest. For example, the IRS charges a 0.5% failure-to-pay penalty on a tax balance for each month it goes unpaid. If you go many months without paying off the tax amount, this penalty will max out at 25% of the unpaid balance.

If the IRS’ repeated attempts to collect are unsuccessful, then they file a Notice of Federal Tax Lien or issue a levy. The lien serves as a way of telling the general public (and other creditors who might be trying to get your property for any other unpaid debts) that the IRS has a claim to your property. While it no longer shows up on credit reports from the three major credit reporting bureaus (Experian, Equifax, and TransUnion), a lien can still limit your ability to obtain loans or sell your property.

A levy is far more serious than a lien in that it results in the IRS taking your property. This could include garnishing your wages or taking money from your bank account. As if the potential of an IRS tax levy wasn’t bad enough, if you receive a levy notice from the IRS and don’t pay off your tax balance, the failure-to-pay penalty increases from 0.5% per month to 1.0% per month (or partial month).

IRS CP501 Notice FAQs 

The Tax Balance on My CP501 Isn’t Mine. What Can I Do? 

Your options depend on why you believe the tax balance isn’t yours. If you believe it’s the result of you being the victim of identity theft, then you can make use of IRS identity theft victim assistance. If you feel the tax debt belongs to your spouse, you might be eligible for innocent spouse relief. 

Can I Receive Tax Forgiveness? 

Tax forgiveness isn’t an official program of the IRS, but they do have certain programs that can reduce the amount of your tax bill in certain situations. The nature of your tax debt and your personal finances will determine if one or more of these programs are available. 

The CP501 Notice Was the Result of a Mistake on a Tax Return. Can I Make a Correction? 

Most likely. If you need to amend a 1040 filing, you can use IRS Form 1040-X, Amended U.S. Individual Income Tax Return. Note that you can only amend a tax return for a refund if you do so within three years of the original filing deadline. 

I Just Got a CP501 Notice Involving a Tax Return From Several Years Ago. Why the Late Notice? 

If the IRS is trying to collect an unpaid tax relating to a 2020 or 2021 tax return, you might not have received a CP501 or other IRS tax notice because of the coronavirus pandemic. During that time, the IRS stopped sending out some of its automatic reminder letters and notices for unpaid taxes.

The IRS has recently resumed sending out its automatic reminder letters relating to unpaid taxes concerning the 2020 and 2021 tax years and in many cases, automatically applied a failure-to-pay penalty waiver. The IRS is sending out LT38 to notify taxpayers about the resumption of collection notices and activity.

Is There Any Situation Where I Can Ignore This Notice? 

The CP501 Notice should mention that you can disregard it if you paid off your tax balance in full within the last 21 days or you’ve already set up an installment or payment plan with the IRS. A third situation where you can ignore the CP501 is if you filed for bankruptcy and the bankruptcy court has issued a stay pausing all collection activities, including those from the IRS. 

Still Have Questions About Your CP501 Letter? 

The good news about a CP501 Notice is that this letter usually comes fairly early in the IRS collections process. This means you still have some time to resolve this tax matter before the IRS takes more significant steps to collect the tax debt. Despite this, you don’t want to ignore it, as you’ll continue accruing interest and penalties that will increase your tax bill.

If you know you want to respond to this notice but aren’t sure how, get in touch with the tax professionals at Damiens Law. They offer free consultations to learn about your case and help you decide what your next steps should be. To get help now, contact us today.