IRS Collection Process

Collection – Notice and Demand

Under federal law, when you file your tax return, you are required to pay the tax at that time. IRC 6151(a). If you do not pay the tax, you will receive a bill, which starts the IRS collection process. The IRS will assign the case to the Collection Division of the Office of the Director in each IRS district. The employees in the Collection Division are known as revenue officers.

Accordingly, it is extremely important to maintain adequate records to substantiate the accuracy of your return—and it is required by law under I.R.C. § 6001. If you have not maintained adequate records, and the IRS has instituted a tax audit, there are other options to substantiate the items on your return.

If you cannot pay the tax shown on your Form 1040, many people think they should simply not file. That is wrong. You must file your return. Our office can help you with a payment arrangement after you file. But you should always file your IRS tax return timely.

The first step in the collection process is called notice and demand. See IRC 6155. The IRS will send you a letter that summarizes the balance due and demands payment in full by a certain date. This notice and demand for payment is usually sent within 60 days after an assessment. It is required before the IRS may collect the tax. If you’ve received one of these bills, you will a computation of tax, penalties and interest. The unpaid balance is subject to interest that compounds daily and a monthly late payment penalty. If you have questions about filing and paying your taxes, contact the tax debt relief lawyer and Columbus, Ohio tax attorney today. 

It is in your best interest to pay your tax liability in full when you file. Doing so will help reduce the the penalty and interest accruals. If you do not have the cash flow to pay, consider borrowing from third parties such as family members and banks or taking cash advances on credit. The rates for third party lending may be less than the interest and penalties charged by the IRS.

Tax Liens

If you do not pay after notice and demand for payment, federal law states that the IRS will acquire a “statutory lien” on all of your real and personal property. See IRC 6321. The statutory lien is also known as the general tax lien, or sometimes referred to as the assessment or “secret” lien.

It is a “secret” lien because it is exists without filing a Notice of Federal Tax Lien (“NFTL”) at the county recorder’s office. The statutory lien attaches no matter what. Whether the IRS has priority is determined by when the NFTL is filed.

The statutory lien is effective from the date the IRS assesses the tax. Thus, if the taxpayer neglects or refuses to pay the assessed tax, then the lien is deemed to relate back to the assessment date. See IRC 6322.

The statutory lien remains active until the tax liability is paid in full or becomes unenforceable by reason of lapse of time. In other words, when the collection statute expiration date (“CSED”) expires, the tax lien becomes unenforceable. IRC § 6322. As we have previously written about, the IRS has ten years to collect a tax liability under IRC § 6502 subject to exceptions.

There are far reaching implications for this very broad statutory lien; it generally encompasses all of the taxpayer’s property or rights to property as security for a tax liability. Our office can help you look at your options to resolve a tax lien if you cannot pay after notice and demand. For example, we can help review your options under IRC 6320. This section gives taxpayers the right to contest the filing of a NFTL. You are entitled to a fair hearing by the IRS Office of Appeals with an officer who has had no prior involvement with respect to the unpaid tax. See IRC 6320(b).

IRS Levy (Seizure)

If you do not pay the tax after receiving a notice and demand for payment, the IRS may proceed with a tax levy. The levy gives the IRS the power of “distraint.” That is, the power to seize and sell your property. See IRC 6331.

Congress has codified many procedural due process rights into the tax law. These rights prohibit a levy until certain requirements have been met. For example, before a levy the IRS generally must verify the tax liability, determine whether equity in the asset is enough to pay the tax, and consider less intrusive collection alternatives.

In practice, this financial information is provided to the IRS on a Collection Information Statement (“CIS”). The CIS is required when a taxpayer requests an alternative to collection action and does not qualify for a guaranteed, streamlined, or In-Business Trust Fund Express agreement, or currently not collectible (“CNC”) status in some situations. See IRM 8.22.7.

Federal law grants taxpayers due process in collection actions. Thus, taxpayers have the right to administratively challenge the IRS’s lien and levy actions. The due process procedures at set forth under IRC 6320 (for liens) and IRC 6330 (for levies). The type of hearing is called a Collection Due Process (“CDP”) hearing. The CDP hearing procedures are also a valuable tool to help avoid a lien or levy. A CDP hearing request is made on Form 12153, Request for a Collection Due Process or Equivalent Hearing. Under the IRS’s rules, you may request a CDP hearing upon receipt of any of the following:

• Letter 3172, Notice of Federal Tax Lien Filing and Your Rights to a Hearing Under IRC 6320
• Letter 11, Final Notice – Notice of Levy and Notice of Your Right To A Hearing
• ACS LT 73
• ACS LT 75
• Letter 1058, Final Notice Reply Within 30 Days
• Letter 1058 (BR) Final Notice Reply Within 30 Days (Braille Version)
• Letter 1058 (SP), Final Notice Reply Within 30 Days – Spanish
• Letter 1058-A Notice of Intent to Levy and Notice of Your Right to a Hearing for Joint Filers
• Letter 1058-A (SP) Notice of Intent to Levy and Notice of Your Right to a Hearing for Joint Filers (Spanish)
• Letter 1058-B Final Notice Reply Within 30 Days – Branded Prescription Drugs
• Letter 1058-D, Post Levy Collection Due Process Notice
• Letter 1058-D (SP) Post Levy Collection Due Process Notice (Spanish)
• Letter 1058-F Post Levy Federal Contractor Collection Due Process
• Letter 1058-F (SP) Post Levy Federal Contractor Collection Due Process Notice (Spanish)
• Letter 1058-I, Final Notice Reply Within 30 Days – Insurance Provider Fee
• CP 77, 90, 92, 242 and 297
• Letter 2439, Notice of Jeopardy Levy and Right of Appeal

See IRM 8.22.4.2.2 (08-26-2020). If a taxpayer files a CDP hearing request, the hearing will be conducted by an impartial Appeals Officer. A taxpayer may bring up a wide variety of issues at the CDP hearing. You may challenge the collection action, raise an innocent spouse relief claim, and request a collection alternative such as installment agreement or offer in compromise.

This is an excellent opportunity to reach a collection arrangement with the IRS. The revenue officer assigned to the case may have been overly aggressive. An impartial Appeals Officer may be more willing to work with you.

Accordingly, the power to levy is relatively rare because of the CDP hearing procedures and the taxpayer’s right to request the IRS consider a collection alternative. The IRS will normally attempt to negotiate an installment agreement, or will consent to a payroll deduction plan before invoking any heavy-handed collection procedures. See IRC 6159. If you’ve received any of the above notices, contact the tax debt relief lawyer and Columbus, Ohio tax attorney today.

Delinquent Returns

The IRS has a program to locate taxpayers who have not filed tax returns. If you have not filed, the IRS will begin sending you notices requesting that you file. While the IRS will request you to file all unfiled returns, collection enforcement is typically only pursued for six years. If you have unfiled returns, consider making a domestic voluntary disclosure.

Taxpayer Options to Stop Enforced Collection Process

Option 1: Payment in Full

The first and best option available to taxpayers is to simply pay the entire tax liability in full. The IRS accepts payments by check or money order. Based on the amount of your tax liability, it may be wise to borrow funds, obtain a cash advance, or pay by credit card because the interest charged on these payment methods may be less than the interest and late payment penalties imposed by the tax laws.

Practice Pointer: The worst thing you can do when you receive a bill from the IRS is nothing. You or your representative should contact the IRS as soon as you receive letters requesting payment. If you do not make arrangements to pay the taxes, the IRS collect the tax by seizing your property under its levy powers.

Option 2: Request an Extension

If you cannot pay the entire tax liability in full, the IRS may be willing to defer payment. If you need extra time to access funds to pay the amount owed, the IRS may grant an extension. Generally, a revenue officer does not need manager approval to grant an extension of up to 120 days to allow you to secure funds.

Option 3: Currently Not Collectible

If your financial situation is such that paying anything will create a hardship, the IRS can place you in currently not collectible status. This will temporarily suspend collection activity against you. The amount you owe, however, will continue to accrue interest and penalties.

Option 4: Installment Agreement

If you cannot full pay your tax liabilities, but you can afford a limited monthly payment, you can request an installment agreement. There is a fee to set up an installment agreement, and interest penalties continue to accrue until the balance is paid in full. Payments under an installment agreement will include an interest charge computed on the unpaid balance. See I.R.C. § 6601.

Option 5: Offer in Compromise

If you have few assets and little prospect of generating sufficient income to pay the liability in full, you may be allowed to settle the tax liability for less than the full amount owed through an offer in compromise. See I.R.C. § 7122.

Option 6: Bankruptcy

Another alternative for a taxpayer facing IRS collection is to file a petition in bankruptcy. Certain taxpayers may be eligible to discharge income taxes in bankruptcy if they meet certain rules, restrictions, and limitations set forth in the Bankruptcy Code. For more information, contact Porter Law Office, or review the IRS’s publication titled, “Using Bankruptcy to Provide Relief from Tax Debt.”

IRS Enforced Collection Alternatives

It is extremely important to contact the IRS on the phone number listed on the notices you received. If you ignore the IRS and do not pay your bill, the IRS will take one of the following actions to collect the tax:

• File a Notice of Federal Tax Lien (“NFTL”) – A federal tax lien is a legal claim to your property. The federal lien arises when the tax liability is assessed and continues until the amount assessed is paid in full or becomes unenforceable. A federal lien will hurt your credit and make it more difficult for your to borrow money to pay your tax debts.
• Serving a Notice of Intent to Levy and Seizing Assets – The IRS is permitted by statute to levy (seize) your home, cars, or other property and, if necessary, sell the property at a public auction to generate proceeds to satisfy the unpaid tax liability. I.R.C. § 6331(b). The IRS may garnish your wages, bank accounts, retirement income, or Social Security benefits. You have the opportunity to request a due process hearing prior to the IRS seizing your assets.
• Offsetting tax refunds – Finally, the IRS will apply current and future federal and state refunds until you have paid down the balance on your unpaid tax liabilities.