IRS Collection Process: How does it work?
As part of my tax resolution practice in Lake Nona, a community within Orlando, FL "the City Beautiful", I know a few things about the IRS collection process. I see clients who are in various stages of the process and don't know exactly what to do next. If you want to know what the next step should be, it's very helpful to understand the process that the IRS is following.
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First off, let's layout the very basics of the collection process itself.
The IRS Collection Process
Your tax return is filed Either you file a tax return or the IRS files a return on your behalf (a substitute for return or "SFR").
The tax is assessed The amount of income tax you owe is assessed to your account. Under normal circumstances this is shown on your tax return and you either get a refund of the excess you paid or you have a tax balance due.
Billing notices / Demand for payment If you have a balance due and did not pay it with the filing of your tax return, the IRS will send a billing notice for the amount you owe. This starts the collection process.
Statutory lien arises The federal tax lien arises automatically when you fail to pay in full the taxes that have been assessed against you within ten days after the IRS sends the first notice of taxes owed and demand for payment.
Notice of federal tax lien (typically filed if you owe > $10,000) The IRS may also file a Notice of Federal Tax Lien in the public records, which publicly notifies your creditors that the IRS has a claim against all your property, including property acquired by you after the filing of the Notice of Federal Tax Lien. The filing of a Notice of Federal Tax Lien may appear on your credit report and may harm your credit rating. Once a lien arises, the IRS generally can't release the lien until the tax, penalty, interest, and recording fees are paid in full or until the IRS may no longer legally collect the tax.
Final notice - 30 day appeal period begins If you fail to resolve your tax problem, the IRS will issue a final notice and an intent to levy. You have 30 days to respond and file an appeal. This is a critical deadline you do not want to miss.
Levies issued A levy is a legal seizure of your property to satisfy a tax debt. This is often the step that gets a taxpayer into an office like mine asking for help. This is the intent of the IRS levy: to force you to do something. You do not want to wait until this step in the process to seek help.
Now that you have a general overview of the process itself, the big question becomes, what do I do now?
Critical actions to resolving your tax debt
Tax compliance Step 1 is always tax compliance. I will explain below a little more about what this means, but you can't go any further until you get into compliance.
Contact the IRS By contacting the IRS you can occasionally get more time to deal with a step or potentially get clarification from the IRS about what they want.
Propose a tax resolution Once you understand the issue, you can propose a resolution. Sometimes this will be as simple as paying the IRS bill.
If the first and most important step is tax compliance... What is tax compliance?
File any missing returns (6 years) You must file missing returns. The IRS considers you compliant if you have filed the previous 6 years' tax returns.
Make current tax payments
Current withholding is sufficient ( if you are a W2 employee)
Current year estimated tax payments are made (if you are self-employed)
Current quarter payroll tax deposits are paid (if you own a business)
Don't throw money at the old debts (not yet) You'll want to evaluate your resolution options before you go and pay off old IRS tax debt. By paying down an old debt you may jeopardize the ability to get an offer in compromise accepted.
Currently not collectable ("CNC") "CNC" status will stop the IRS collection process without extending the amount of time they have to collect. This is based on the calculation the IRS uses to determine your ability to pay.
Offer in compromise ("OIC") This is what everyone wants. "Settle you tax for pennies on the dollar." There is no guarantee with an offer in compromise. The IRS never has to accept one. However, if we utilize their formula to determine Reasonable Collection Potential or "RCP", we can either make an offer that has a high likelihood of being accepted or avoid wasting money by preparing an offer in compromise in a situation where the IRS will never accept one.
Installment agreement Installment agreement is a payment plan with the IRS. Just like the offer in compromise, there is a formula that will help determine an acceptable payment plan. There are also three different types of payment plans and not all taxpayers qualify for all types.
Regular A payment plan where you will fully pay the taxes due over the remaining collection period.
Streamlined A simplified application for payment plan for those whose tax debt is low enough and the full balance can be paid over a minimum specified number of months.
Partial-pay Similar to an offer in compromise where you do not end up paying the full amount of taxes due.
I enjoy helping individuals with tax preparation and tax planning as well as offering tax help to individuals dealing with tax debt, IRS liens, IRS levies, Wage Garnishments, etc. I also service businesses (including nonprofits and churches) by providing tax preparation and tax planning as well as consulting for accounting, bookkeeping, and other finance related questions. I live in Orlando, FL, but I serve clients all across the country. Schedule an appointment if you need assistance and take a look at the resource page.
6900 Tavistock Lakes Blvd Ste 400
Orlando, FL 32827
Serving clients in Orlando, Lake Nona, Altamonte Springs, Apopka, Azalea Park, Celebration, Hunters Creek, Lake Buena Vista, Lake Hart, St Cloud, Winter Garden, Winter Park and via the latest technology remotely around the country.
*The blog posts (as well as the YouTube channel) are my personal opinions and thoughts about a wide range of topics. They are not meant to apply to individuals specifically and should never be relied on as tax or investment advice. You should contact a professional for specific advice before taking action.