How the IRS Tax Collections Process Works

man reading his notice from the IRS

The whole world has been in the grasp of the Coronavirus for the past two years. During this time, the government has done many things to try and aid people financially. There have been three different stimulus checks sent out, the federal government provided extra money for unemployment benefits on top of what the states normally provided, and they provided many other funding programs to assist those who were struggling financially. They even recently made $10,200 of the unemployment compensation that a person received during 2020 tax-free. 

The IRS also took a huge step back in collection activities and even suspended many active installment agreements. Beginning in 2020 however, they gradually resumed collection efforts but still left many of their collection systems idle including involuntary collections such as garnishments and levies.

In June of this year, the IRS released a notice stating they felt that the current economic situation deemed that they could resume full collection activity to maintain a fair and just taxing system. So, they began sending collection letters on June 15th. A sequence of letters is usually sent notifying the taxpayer where they are in the collections process in order to give the taxpayer an opportunity to either pay the tax debt, work out some sort of payment arrangement with the IRS, or hire representation to enforce their rights on the repayment of the tax debt.


The Notice of Balance Due

Typically, the sequence of these letters would begin with the filing of the taxes on or before April 15th. Once the IRS processes your tax return or if the IRS has made a change to your return, an initial notice is sent out. This is called a Notice of Balance Due and will either be a Notice CP501, CP503, or CP504. This year, the IRS started sending out these notices on June 15th.

These are not threatening letters. The notices explain how much you owe, when your payment is due, and your payment options. It also tells you how to contact them if you disagree with the amount owed. At this point, you can request a collection due process hearing using Form 12153. 

You typically have 30 days from receipt of the first letter to dispute the debt with the IRS. Afterward, notices are sent sequentially every 4 weeks until the balance is paid in full. If not, the IRS will begin taking collection action.

At this point, you have a few options. If you can afford to pay the tax debt in full, that is always the best course of action. Anytime there is an outstanding debt with the IRS, it is subject to penalties, fees, and interest that typically continue to accrue until the debt is satisfied. 

If you cannot pay the balance in full but you do have the means to pay over time, there are short-term and long-term payment arrangements available. 

If you do not have the income to support the payment required in these plans, there are also hardship programs available. If an inability to pay can be proven, you may qualify for a reduced payment or even a full-on hardship status, otherwise known as a “currently non-collectible” status or CNC. In a CNC status, you will not be required to make a payment on the tax debt until your financial situation improves and you can afford to pay. 

Another hardship program that is available with the IRS is the Offer in Compromise. This is where the IRS may agree to accept a lesser amount than what is owed and forgive the remainder of the tax debt.

A taxpayer can absolutely deal directly with the IRS on their own and try to take advantage of any of these programs. Like everything else in life, you can take a chance and try it on your own or you can hire a tax professional that does this every day and is thoroughly knowledgeable about tax law and the taxpayer rights involved.


The Notice of Intent to Levy

If a taxpayer ignores these letters and does not either hire representation to respond to the IRS or contacts them directly, they will then receive a Notice of Intent to Levy, known as Notice CP504. The IRS may give you this notice in person, leave it at your home or place of business, or send it to your last known address by certified or registered mail. 

This Notice of Intent to Levy is an important step and one to be taken seriously because it satisfies the requirement of the government to notify the taxpayer before it begins seizing assets. Interestingly, there is no actual requirement stating that the letter must be received by the taxpayer. If the IRS mails the notice to the taxpayer at their last known address, that action satisfies their legal obligation and they can then pursue collections. But until this notice is sent, the IRS cannot use involuntary collections against a person.

A Notice of Intent to Levy may appear to be very threatening but it is not meant to scare a taxpayer to pay the amount they owe. It is simply a legal notice from the IRS stating that they plan to use involuntary collections to collect on the tax debt. 

If a taxpayer has received this notice, their situation is now very serious. This is the point when a taxpayer must either take steps to resolve the matter directly with the IRS or hire representation because the IRS is literally telling the individual what they are about to do–enforce collections. 

If the taxpayer does not respond to this notice, the taxpayer’s case is either sent to the Automated Collection System (ACS) or to a Revenue Officer for collections. Some accounts may initially be assigned to ACS only to be transferred to a Revenue Officer later.


The IRS Automated Collection System

The Automated Collection System is comprised of many large call centers located in multiple cities where ACS Agents take incoming calls from taxpayers, review cases, and issue notices of tax debt and collection actions on behalf of the IRS. Most tax debts below $100,000 are assigned to ACS. 

The cases that are in ACS are not assigned to specific agents but exist within the system and are fielded by agents when the need arises. The system uses a computer program that ranks and selects tax debts based on the amount owed and the age of the debt. This means that the collection process of the ACS can be very sporadic.

I have helped clients that owed large amounts of money to the IRS and also had unfiled taxes but somehow flew under the radar of the ACS for years. I have also spoken to many sweet little old ladies living solely on social security income barely making it by that owed very small balances to the IRS but were being garnished. So, there is no real rhyme or reason as to who the system selects and who flies under the radar.

The Automated Collection System contains computerized records of a taxpayer’s sources of income and assets such as their wages, bank accounts, certificates of deposit, and accounts receivable, all of which can be seized administratively from them. Since the Notice of Intent has already been sent to the person, the system can issue wage garnishments and bank account levies without any further warning. 

ACS may also file a Federal Tax Lien against a taxpayer to secure their interests in any property that they may hold. The lien is put in place so that if the taxpayer tries to sell or refinance a property such as their house, the IRS will receive the proceeds to pay the tax debt.


When a Revenue Officer Gets Involved

If ACS is unable to recover the debt, the debt may then be assigned to a Revenue Officer for further collections. In cases that involve large tax debts of $100,000 or more, the case typically goes directly to a Revenue Officer and completely skips ACS. If you get to this point in the process and a Revenue Officer has been assigned to your case, there is no more ignoring the situation. 

A Revenue Officer also gets involved when the tax debt stems from payroll taxes. If an employer withholds taxes but does not turn them over to the IRS, this is generally viewed by the IRS as stealing. If not paid upon demand, these debts are typically assigned directly to a Revenue Officer. 

Revenue Officers have the power to issue summons to a taxpayer or business and demand the taxpayer show up at their office at a certain time with records in hand. They are also usually local and can make surprise visits to a taxpayer’s home or place of employment. If you refuse to respond to a Revenue Officer, they can involve IRS district counsel who then can get a court order and force you to comply with the summons. 

If your case gets to this point, it is at the highest level within the IRS Collections System and I highly recommend that you hire a legitimate tax professional immediately to represent you or your business.


Be Proactive, Not Reactive

Throughout my time in this industry, I have dealt with many different types of people. I have always used one main classifier to describe how a person deals with the IRS: a taxpayer is either proactive or reactive. 

Proactive people don’t get themselves into these types of situations or if they do they immediately deal with the situation when a notice arrives. During this part of the collections process when notices are being sent, you have a lot of rights. You can either deal directly with the IRS on your own or hire a true tax professional to represent your rights in the collections process. 

Then there is the reactive person. This is the type of person that ignores all of the IRS letters either out of fear or with the thought that the IRS really won’t do anything about their debt. This type of taxpayer tries to deal with the situation after the IRS has begun a garnishment, froze their bank account, or a Revenue Officer is knocking at their door. At this point, they still have rights but these cases are much harder to deal with. 

The most important piece of advice I can give is to be proactive when it comes to dealing with the IRS. In their recent budgets, the government has allocated extra funding to the IRS to enhance their collections, so the chance of flying under the radar is a lot lower now.

And if you do have a large tax debt, it will always financially benefit you to hire a legitimate tax professional to be your advocate.

If you have received a notice from the IRS or they have already begun taking collection action against you, contact us today for a free consultation so that we can protect your rights and finances and help you resolve your tax issues ASAP.


IRS Resumes All Tax Collections and Doubles Workforce to Snag Tax Cheats

woman upset over a collection letter from the IRS

Last March the United States and the rest of the world basically came to a screeching halt. The Covid-19 pandemic swept through society forcing the biggest halt to business, government, and people’s lives in modern history. Many people were forced out of work and were in fear of not being able to pay their bills. 

During this time, the IRS took a step back in their collection activity to take some pressure off taxpayers. The IRS since this time has slowly begun to restart many different processes. Now a year and a half later the IRS has announced that it will resume many of the collection processes that have been idle in the past year and a half. 

In this article, I will start by explaining the efforts the IRS took to take this pressure off Americans that owed money to the IRS. I will follow that up by further explaining the collections activities that the IRS is immediately resuming and detail the future and proposals by the IRS and the President to seriously beef up the Investigation and Collections Departments within the IRS.


The People First Initiative

On March 25, 2020, the IRS began its People First Initiative to help people facing the challenges of Covid-19. The IRS announces that they would take a series of steps to assist taxpayers by providing relief on a variety of issues ranging from easing payment guidelines to postponing compliance actions. 

IRS Commissioner Chuck Rettig said, ”The IRS is taking extraordinary steps to help the people of our country. In addition to extending tax deadlines and working on new legislation, the IRS is pursuing unprecedented actions to ease the burden on people facing tax issues. During this difficult time, we want people working together, focused on their well-being, helping each other and the less fortunate.”

The IRS made major changes such as postponing the filing deadline from April until July 15th.  They also suspended payments for any taxpayers in agreed-upon Installment Arrangements between April 1 and July 15th, 2020. They agreed they would not default any taxpayers who fail to make these payments during this time. 

They also suspended payments and deadlines for taxpayers in or applying for the Offer in Compromise Program. Also, all liens and levies either through the automated system or in place by active field agents were all suspended as well.


Resuming Collections

On July 15,  2020, the IRS slowly began resuming its processes. They announced to taxpayers that if you suspended your installment agreements you must make your first monthly payment due after July 15th. If you had your bank suspend direct debits, then you needed to contact your bank immediately to avoid a penalty. The same was required with all payments for people in the OIC program. At this point, they did resume some involuntary collections, but they kept most of the automated collections systems idle. 

On June 14, 2021, the IRS announced that due to the recent progress the country has made in controlling the Covid-19 pandemic, economic activity is returning to normal. Therefore, the IRS plans to return to its normal collection casework processes in the summer of 2021 to support the integrity of the nation’s tax system. 

Beginning June 2021, the IRS will start mailing balance due notices through the Automated Collection System. If taxpayers fail to respond to these letters they could be subject to levies or notice of Federal Tax Lien Filings beginning August 15, 2021. 


Proposal to Double the IRS Workforce

Not only has the IRS resumed their normal collections but there have been proposals made to seriously expand the IRS budget to help reduce what they call the tax gap. 

The tax gap is the difference between what taxpayers should pay and what they pay on time. The tax gap, about $458 billion based on updated estimates, represents the amount of noncompliance with the tax laws. President Biden plans to propose an $80 billion funding boost for the Internal Revenue Service over the next decade. This budget increase would allow the IRS to hire nearly 87,000 new workers which would double its enforcement staffing and give it new tools to combat tax-dodging by wealthy Americans. 

This proposal being a multi-year commitment would allow the IRS to hire and properly train enforcement staff and ramp up audits with less risk of lawmakers stopping such an initiative halfway through. The plan would allocate about $30 billion of this money towards advancements for new tools and technology to execute collections and crackdown on avoidance. 


Proposal to Change How Income Is Reported to the IRS

A big change to the system would be how income is being reported. Right now, with the way that individual income is reported, there is almost 100% compliance. Where the problem lies is with self-employed individuals and business income. Estimated compliance with these individuals and entities is around 50%. Under the plan, banks and other payment providers would be required to report to the IRS how much money is coming in and out of an individuals’ and business’ account each year. This information would give the IRS much more information as it decides who to audit.

Also, the proposal would increase oversight on all paid tax return preparers. This would give the IRS explicit authority to regulate all paid preparers of Federal tax returns, including by establishing minimum competency standards. Unfortunately, at this time in our industry, there are people without the educational background needed to correctly file taxes for people. Many of these types of preparers also do a lot on the tax filings to increase one’s tax refunds through erroneous means. 

Most taxpayers are unaware of the methods these tax preparers use to help them get larger refunds and those same methods could get them into trouble with the IRS. Regulating this part of our industry will cut the tax gap down significantly.


What the Proposed Changes Would Accomplish

This major investment would be over the long term and the administration projects that the plan would generate over $700 billion over 10 years in net revenue. In the short term, the President included in his 2022 budget proposal $13.2 billion, an increase of 1.2 billion from 2021 for the IRS to administer the nation’s tax system fairly. 

In addition to this base amount the budget also proposes another $417 million in 2022 to fund investments in expanding and improving the effectiveness and efficiency of the IRS’ overall tax enforcement program. This would be a total of $13.6 billion in funding for the IRS. The budget requests a total program increase of $915.5 million including the following:

  • Taxpayer First Act (TFA): $176.1 million for implementing major TFA initiatives, including a Taxpayer Experience Strategy to improve the American taxpayer’s experience with the IRS through expanded digital services, increased multilingual services, and an increased presence in hard-to-reach, historically underserved communities. Another major TFA initiative involves enhancing identity proofing and authentication tools, to ensure taxpayers have secure access to online services.
  • Enforcement: $340 million for continuing to establish enforcement strategies that will ensure a fair tax system, by allowing the IRS eventually to double its compliance efforts on partnerships and high-wealth returns and devote more resources to examining large corporations with balance sheet assets greater than $10 million. Other initiatives supported by this investment include The Cross Border and Treaty and Transfer Pricing Operations; expansion of oversight efforts against cybercrime; increased use of applied data analytics in enforcement activities; and enhancing taxpayer confidence in the tax-exempt sector.
  • Taxpayer Service: $318 million to increase taxpayer assistance via the various communication channels taxpayers use to reach us, including phone calls, correspondence, and in-person visits. This investment provides a projected phone level of service (LOS) of 75 percent in FY 2022, assuming phone demand returns to pre-pandemic levels and the IRS is able to provide in-person services at pre-pandemic levels. These funds will also be used to reduce the current projected FY 2022 ending correspondence inventory by about 400,000 pieces.
  • Modernization: $78.1 million for IT modernization activities. This investment will support IRS efforts to continue implementing its Integrated Modernization Business plan for upgrading IT systems and retiring legacy applications. With this funding, the IRS will be able to take the next steps on such significant modernization initiatives as Enterprise Case Management, Taxpayer Digital Communications, and customer callback on its taxpayer phone lines. 

With all these changes coming to the IRS it is particularly important that all delinquent taxpayers have themselves into some sort of program to protect themselves.  When it comes to owing taxes, a compliant taxpayer has a lot of rights that can be enforced to save them a lot of money. It is important that someone in this situation gets the proper representation. Enrolled Agents and CPAs have the educational background and licensing to best represent you in these types of situations. 

With billions being funneled into the IRS to make sure that these tax dollars are recovered it is especially important that a taxpayer is proactive so the repayment of tax debt can be on their terms and so they are not seriously overpaying on their tax debt. It sounds like with these improvements to the IRS the days of flying under the radar are done and gone.


FAQs: IRS Collection

the IRS seal

What can the IRS do if you owe them money?

According to the IRS, their job is to find ways to recuperate their money. In doing so, they may seize (levy) your assets, such as retirement income, social security benefits, bank accounts, and wages. They may even seize your real estate, boat, car, and any other property you may have and sell it to satisfy the debt.

The first way to collect their money comes from garnishments. For example, if you are self-employed and 1099’d, they can take 100% out of your paycheck. W-2’d individuals, on the other hand, are in a slightly better position, especially those married with kids. The IRS can take most, but not all, depending on their filing status.

Aside from that, the IRS can garnish income through a business’ merchant account, such as PayPal, Stripe, and Square. In this case, they can take it all (100%). As for self-employed with personal tax debt, the IRS will send a garnishment letter to the business to garnish the owner’s wages. So, although they cannot take money from the business, they have figured out a way to get their owed money back since almost nobody chooses to garnish themselves.

That aside, if you have any state income tax refunds or future federal tax refunds, the IRS may seize them and then apply them to your federal tax liability.

Can the IRS put you in jail?

Generally, no. There is no such thing as a debtor’s prison, although an unfiled tax return is punishable by 12 months in jail, at least on paper. The IRS chooses not to pursue criminal tax evasion cases for many individuals annually. However, those that are caught are called to pay harsh penalties. These cases have to do with criminal intent, such as blatant tax evasion, and start with an audit of the filed tax return.

If the IRS identifies a pattern of willful evasion (i.e., large error sums occurring for several years), they have a strong indication that the taxpayer has willingly and knowingly committed serious tax evasion. This, consequently brings them under criminal investigation. The same applies to unreported income (i.e., from a side hustle) and dodgy behavior during an audit (i.e., purposely hide bank accounts or other records).

So, even though the IRS itself cannot put you behind bars, the court can if the IRS initiates a criminal investigation and you are found guilty. Although this is rarely the case (very few taxpayers face criminal charges for tax fraud annually), it still is a possible scenario.

Can the IRS levy your bank account?

Yes. An IRS levy gives the service the right to seize your property to satisfy a tax debt. Besides garnishing your wage and seizing your personal property, they can also take money from a financial account, such as a bank account. To do this, they first freeze the account for 21 days. Whatever money you have in that account is turned over to the IRS at the end of the 21-day period. This is an automated process done by the bank. Note that the IRS can levy any bank account in which your name appears, whether you are the sole owner or co-owner.

This is a serious situation that can put the taxpayer in a very tough spot. Nevertheless, Innovative Tax Relief knows how to fix it if you act fast. Although it is a difficult task, there is a good chance that you can get the account funds unfrozen and the levy lifted if we have enough time in the 21-day window. Our expertise can help achieve this outcome and make the IRS change course.

Can the IRS place a lien on your property?

Yes. The IRS can place a lien on your property, which means that you will have to pay the due amount when you sell it. It should be noted that the IRA cannot force a foreclosure on your primary home. But they can take your second home or an investment property and force a sale. Generally speaking, they do it when the tax debt is over $25k.

This is because a lien is a legal claim against your property to satisfy a tax debt as opposed to a levy which is a legal seizure of your property for the same reasons. In other words, a levy allows the IRS to take your property while a lien does not.

If you get a lien, though, all creditors are alert that the government has a legal right to your property as the IRS files the Notice of Federal Tax Lien, a public document that informs creditors that there is a secure claim against your assets. This can affect your credit report as credit reporting agencies can find the Notice and include it in your credit report. A levy is nothing like that as it is not a public record.

Can the IRS seize your business property?

In short, yes. The IRS can seize your business property to get paid the amount you owe them. They cannot seize business assets tied to no net recovery for the IRS. This means that they can get their hands only on business property that has equity. In doing so, they start the collection process by sending you a Notice and Demand for Payment letter.

At this time, you may be offered installment payment plans to repay your due taxes, depending on your financial circumstances. Or, you could file an Offer in Compromise, which will allow the IRS to consider the tax bill as fully repaid by making a partial tax payment. If you refuse to pay your taxes or don’t respond to the letter, the IRS sends a Notice of Federal Tax Lien, which enables them to claim your business property (both present and future).

The Notice of Levy is the final step before your business property is seized for back taxes. Usually, you have 30 days before they actually seize your business assets. During this time, you can make some efforts to stop the levy (i.e., set up an installment payment plan, discuss your case with an IRS manager, etc.).

If you reach no resolution within the 30-day window, the IRS will seize your business property, including rental income and accounts receivables, and force a sheriff’s sale of the business property and business items.

Also, if you operate as a sole proprietorship (have personal liability for the owed business taxes), the IRS may even garnish your Social Security benefits, retirement payments, and wages to pay the tax bill.

Innovative Tax Relief can help you stop the seizure by trying to appeal the levy., which is a time-consuming process and often overwhelming for business owners.

Can the IRS repo your vehicle?

The IRS has the legal right to take your vehicle’s title, right, and interest. This means that they can seize a vehicle you own. However, this is an option that is left as a last resort. The IRS will only consider seizing your car or another vehicle if there is equity in it.

For instance, if you have purchased a $15,000 car and are making payments on it and still owe $12,000, it will be highly unlikely for the IRS to take it. If you have paid off a $25,000 vehicle, though, they will seize it. This is because there should be equity so the IRS can keep it (the equity) after they auction off the vehicle and repay the lien holder. If there is no equity, they are not interested in seizing your car.

In general, the IRS will not pursue repossessing your vehicle unless there is around 20% equity they can get from the sale of your vehicle. And, this is after they take out 20% of your asset of the fair market price. So, a $30,000 vehicle they seize is actually worth $24,000.

Aside from that, the Congress passed the Taxpayer Bill of Rights in 1988, which gives taxpayers more rights concerning what the IRS can seize. The same bill also limits the IRS’ actions in regards to the process in which they can seize it. In other words, the IRS won’t just show up one day at your business or home and seize your vehicle. They are obliged to give you a 30-day notice of the intent. Plus, you have the legal right to be represented by a CPA or attorney and appeal an IRS decision.

All in all, the IRS does not favor repossessions of taxpayers’ assets, like their vehicle. They will, instead, want to work out any issues related to back taxes as they usually understand that seizing your vehicle can severely affect your day-to-day life. There is also a code that does not allow the IRS to put an additional economic burden on you (or cause one).

However, the IRS CAN seize and sell your second and third vehicles. If you find yourself in such a situation, please contact Innovative Tax Relief to assist you in keeping your vehicle and settling with the IRS.