Introduction

For many individuals and business owners, the arrival of a collection notice or letter from the IRS is the first sign that they face serious tax trouble. Those who fail to address these communications in a timely fashion may face more serious consequences in the months and years that follow. The IRS can recover back taxes and penalties through many means, including:

  • Wage or tax refund garnishments
  • Punitive tax levies
  • Liens against personal or corporate property
  • Asset seizures

If you wish to avoid these costly problems, you must understand how to interpret and respond to collection notices and letters. While every tax situation is unique, collections processes generally unfold in a predictable manner. This page will provide you with important information and tools that you can use in your own fight against the IRS’s tax collection efforts.

The Collection Process

The IRS is a sprawling organization with an intimidating reputation, and the scope of its work is staggering. To the agency’s credit, it makes no attempt to hide this fact. Many collection notices and letters concern relatively straightforward issues.

These can include:

  • Demands for payment on past-due tax balances
  • Requests for additional financial information, supplemental forms or other documentation
  • Notices of changes to your account status or balance

There are two broad types of IRS collection notices and letters: those with which the recipient agrees and those with which the recipient does not agree.

If you intend to honor a notice that requests payment, simply follow its instructions to settle your account. If you receive an “account change” notice that does not request immediate payment, you will not need to respond.

If you failed to pay your taxes in full or owe back taxes from previous fiscal years, your notice will contain a line-by-line accounting of your outstanding balance, penalties, fees and interest. If you wish to dispute the requested payment amount or the request itself, you must reply with a written account of your disagreement and save all current and future correspondence. Once you respond, it can take a month or longer to hear back from the agency.

If you do not satisfy this bill by its due date, the IRS will mount an increasingly aggressive campaign to recover the funds. If full payment is not an option, you may be able to stave off collections activity by taking steps like:

  • Obtaining a cash advance or credit line to finance your payment
  • Setting up a monthly payment agreement
  • Negotiating an Offer in Compromise (OIC)
  • Claiming a financial hardship that prevents you from making any payment at all

However, all these tactics come with significant drawbacks. For instance:

  • Credit card cash advances, payday loans, credit lines and monthly payment agreements may saddle you with high interest rates, complex fee structures and other financial problems
  • Financial hardship claims may encourage the IRS to enact a lien against property that you currently own or acquire after the claim is filed

The IRS files federal tax liens against most delinquent taxpayers. While there are ways to avoid the full effect of tax liens, regular folks who have jobs, families and other financial problems on their mind may find them difficult or impossible to execute on their own.

Common Collection Notices and What They Mean

The IRS sends out many types of collection notices and letters. We list some of the most common below.

CP 71C: Reminder of Overdue Taxes

A CP 71C notice typically covers balances that have remained unpaid for several years and specifies:

  • The original amount owed
  • The tax year in which it was owed
  • The interest amount that the balance has accrued
  • The date by which the recipient is required to remit payment

CP 501/502: Notice of Balance Due

A CP 501 letter serves as your first notice of an overdue tax balance. It is usually sent before the IRS initiates liens, levies, garnishments or other tax collection attempts.

If you fail to acknowledge your receipt of a CP 501 notice, you will receive a CP 502 notice that informs you of additional interest charges and penalties on your account and encourages you to make an immediate payment-in-full. This notice may come with additional documents like:

  • Privacy Act Notice 609
  • Line-item accounting of your interest liability

CP 503: Second Notice of Balance Due

This could be the last balance-due notice that you receive before the IRS initiates more aggressive collections measures. It typically provides a 10-day time frame for full payment of your past-due account balance.

CP 504: Final Notice of Balance Due

A CP 504 notice typically precedes a formal Notice of Intent to Levy. It will recap your back-tax liability with additional interest charges and announce the IRS’s intention to garnish your state tax refund. If you live in a state without a personal income tax, your CP 504 notice may contain a warning that the IRS will place levies or liens against additional assets or wages.

CP 521: Installment Agreement Payment Due

This notice comes after the deadline for a back-tax installment payment has passed. Like notices in the CP 50x series, CP 521 lists the past-due balance with interest charges and demands payment by a specific date. Once you receive this notice, your past-due balances will continue to accrue interest. You may also be subject to other penalties, including the outright cancellation of your installment agreement.

CP 523: Installment Agreement Default: Notice of Intent to Levy

If you are unable or unwilling to make your installment payments on time, you will receive a CP 523 notice that demands immediate repayment of your balance. Failure to acknowledge this notice will result in the cancellation of your installment agreement and the enactment of liens, bank account levies and wage garnishments. Even if you can avoid cancellation, you may be required to pay a fee before continuing with your payments.

CP 90/CP-297: Final Notice of Levy and Notice of Your Right to a Hearing

This serves as your final notice of the IRS’s intent to place a levy on your assets, wages or accounts. To prevent such a levy, you will need to pay your balance in full within 30 days. If you are unable or unwilling to do so, the notice also provides information about filing a Form 12153 to request a Collection Due Process Hearing. While this step can forestall IRS levies, it is a complicated undertaking that may not solve your underlying tax problem.

Letter 1058 (LT 11): Final Notice/Collection Due Process Notice

Like CP 90, this letter serves as a last warning of an impending levy. Failure to pay its stated balance in full will result in the imposition of said levy. Additionally, the letter broadly reserves the IRS’s right to search for other assets or income streams to levy.

Letter 3172: Notice of Federal Tax Lien Filing & Your Rights to a Hearing under IRC 6320

Letter 3172 is a formal notice of a tax lien against your physical and financial assets. It provides the IRS with the right to seize the proceeds from the sale of any assets that you currently own or acquire after the lien’s issuance. Additionally, it protects the IRS’s right to collect on your tax debt by all legal means. Federal tax liens cannot be discharged in bankruptcy.

Letter 668D (LP 68): Release of Levy

This document serves as notice that the IRS has lifted an existing levy. It is typically sent to the employers, banks and other institutions that may have been required to turn over your financial assets or wages to the IRS. After receiving the notice, these organizations are encouraged but not required to pass the news along to you. LP 68 notices may be issued at the expiration of the statute of limitations on collections activity or upon the IRS’s discovery that it made an error during the collections process.

What to Do After Receiving a Notice

Even if the IRS makes an error in calculating your back-tax balance or oversteps its bounds in placing a lien or levy on your assets, it can take years for the agency to make the necessary corrections. In the meantime, your credit rating, career and personal relationships may suffer.

As you consider your next move, remember the “golden rule” that has served past taxpayers well: It does not pay to panic. You do not have to face the IRS on your own, and doing so might actually make matters worse. Since the agency’s collection specialists are trained to elicit incriminating statements from their targets, any attempt that you make to cooperate may result in harsher penalties and other unforeseen consequences.

Fortunately, there is outside help available to taxpayers who receive IRS collection notices. In the following section, you will learn how you can respond to a collection notice if you cannot pay it in full.

What If You Can't Pay the IRS?

The IRS is a massive organization with an annual budget of about $12 billion. To sustain and expand its operations, it needs to collect billions of dollars in taxes, interest, fees and penalties from individual taxpayers like you. You are not the agency’s only target.

Since the IRS casts such a wide net, its agents know that it cannot hope to collect every dollar that it requests. In fact, the IRS routinely accepts partial payments -- known as Offers in Compromise -- from delinquent taxpayers. If you believe that you have been unfairly targeted by the IRS or know that you cannot pay the amount that the agency has requested from you, there are several ways you can resolve your tax problems, including:

Filing an Appeal

Under the Due Process clause of the U.S. Constitution and the bylaws that govern the IRS’s operations, you have the right to contest back-tax levies and asset seizures. If the IRS garnishes your wages or puts a lien on your property, use IRS Form 12153 to request a Collection Due Process Hearing. You can prepare for this hearing by:

  • Saving all IRS correspondence
  • Compiling financial records that dispute the IRS’s account of your tax liability
  • Looking for evidence that the liens or levies at issue are unlawful

Negotiating an Installment Plan

You can negotiate an installment plan at any point during the collections process. The IRS is willing to work with taxpayers who make a good-faith effort to repay back taxes. Be sure to prepare for these negotiations:

  • Make a thorough accounting of your income and liquid assets
  • Present this figure to the IRS
  • Arrive at a reasonable payment that both parties can accept
  • Avoid further fees, penalties or interest by making these payments on time

Entering the “Currently Not Collectible” Pool

You can temporarily avoid making any back-tax payments by securing your place in the IRS’s “currently not collectible” pool. To do so, you will need to prove that you:

  • Are indigent or homeless
  • Have a terminal illness
  • Have a chronic condition that prevents you from securing gainful employment
  • Are enduring other extraordinary hardships

If your circumstances persist past the expiration of the statute of limitations on the IRS’s collection activities, you may “run out the clock” on your tax debt.

Working Out an Offer in Compromise

If you can convince the IRS that you will be unable to pay back your tax debt in a timely fashion, it may elect to explore an Offer in Compromise on your case. An Offer in Compromise is a tax settlement that may require you to pay just a small fraction of what the agency originally demanded. However, the process by which Offers in Compromise are set up is not akin to a negotiation. Rather, it is a complex, time-consuming affair that requires the assistance of an experienced tax resolution professional.

Making a Sensible Choice

While it is feasible for the average taxpayer to fight or negotiate with the IRS on his or her own, it is often impractical to do so. An experienced, reputable tax resolution specialist can help you at every step of the process:

  • Interpreting and explaining collection notices
  • Communicating with the IRS on your behalf
  • Putting a stop to intimidating letters and other forms of harassment
  • Providing sound advice about your options
  • Negotiating payment plans, Offers in Compromise and other agreements
  • Guiding you through the appeals process
  • Preventing the disclosure of incriminating information
  • Ensuring that the IRS does not overstep its legal bounds

Your future rides on a favorable outcome to your tax problems, and you deserve the best possible representation for your case. If you have any questions about the information contained in this resource or find yourself at the center of a dispute over unpaid taxes, contact our team today for a free, no-obligation consultation.

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