The IRS Collection Process Explained

It is extremely common to owe back taxes. In fact, over 18 million Americans owe overdue taxes. With how widespread this problem is, it should be no surprise that the IRS has a standardized collection process in place. If you owe back taxes, it is crucial that you have an understanding of this process. Doing so will ensure that you understand how long you have to pay, as well as the consequences for failing to do so.

Initial Balance Due

The initial balance due is the amount you owe the IRS after filing your taxes. Once you are informed of this balance, generally you have 21 days in which to pay it. You will receive notice CP14, which is simply a notice to inform you that you have a balance due and what the amount of that balance is. If possible, it is best to pay this balance immediately. Doing so will ensure that you avoid the costly penalties that come along later in the collection process.

IRS Sends a Series of Notices 

Throughout the collection process, the IRS will be sure that you don’t forget you have a tax debt. They accomplish this through a series of notices. As mentioned, the first notice is CP14, which informs you that you have a balance due. After this, you will receive notice CP501. This is just a reminder that you still have a balance due. It gets sent out when you fail to respond to the first notice. You will then receive yet another reminder notice in the form of CP503.

So far, all of these notices have simply been reminders, informing you of your tax debt and any penalties you have accrued. However, if you ignore the previously mentioned notices, things get serious. Eventually, you will receive notice CP504. This is an intent to levy, meaning that the IRS intends to seize state tax refunds or other property to pay off your debt. It also serves as a final notice before they start looking at other assets

Penalties Accrue

Throughout the collection process, additional penalties will be applied to the balance owed. If your tax debt resulted from a failure to file, the penalty is 5% of the amount owed for every month or partial month that your debt goes unpaid. If it resulted from failure to pay, The penalty is 0.5% of the unpaid taxes for each month or partial month the debt remains unpaid. Regardless of the source of your tax debt, penalties are capped at 25% of the amount owed. These penalties are an integral part of the collection process, designed to pressure you to pay sooner rather than later.

Tax Lien

Once your debt has gone unpaid for a substantial amount of time, usually 4-6 months, the IRS will file a Notice of Federal Tax Lien. This is the government’s legal claim against your property. The lien protects the government’s interest in all of your property, including real estate, personal property and financial assets. While it isn’t the same as an immediate seizure, it ‘attaches’ to your assets (like your home or car), making it nearly impossible to sell or refinance them without paying the IRS first If you reach this part of the collection process, it is time to take action before your property is seized.  

Enforcement Actions

The final part of the collection process is enforcement action. This is when the IRS is done waiting for you to pay and is ready to forcibly take what they are owed. The IRS will send a “Final Notice of Intent to Levy and Notice of Your Right to a Hearing”. Once this is received you will have 30 days to pay, request a conference, or arrange a payment plan before enforcement action is taken. There are a few common enforcement actions the IRS uses at this stage.

Wage Garnishment 

This is one of the most common enforcement actions taken. The IRS will seize a portion of your paycheck, 25% or more, to pay your tax debt. To determine how much will be garnished, the IRS uses a standard deduction to determine a small ‘exempt’ amount you are allowed to keep for basic living expenses, and they take everything else, which can result in a much larger hit than the 25% cap used by other debt collectors. This is done through your employer, who is required to comply through IRS Form 668-W. Your employer will withhold a portion of your wages, bonuses, or commissions and give it to the IRS until your debt is paid off.

Bank Account Levies

An IRS bank levy freezes funds in your account to pay your tax debt. This means that you cannot withdraw these funds. The bank will hold the funds for 21 days before transferring them to the IRS. During this holding period, you can contact the IRS to stop the transfer by working out a payment plan.

Property Seizure

This is when the IRS seizes real estate, vehicles, and other high value property. The property is then sold to pay off your tax debt. This is only used as a last resort and will likely only occur if you have no income or bank accounts.

How to Stop the IRS Collection Process

The only way to stop the collection process is to pay what you owe or work out a payment plan of some sort. Of course, this can be easier said than done. The best thing you can do is hire a professional in tax relief services. They can contact the IRS on your behalf and help stop the collection process by finding you a payment plan or other option that works for you.