Understanding the IRS collections process

The why, when and how of IRS collection actions – avoid collection or handle it smartly.

Don't let IRS tax collection hold you back

The IRS initiates collection actions when you make no effort to pay or resolve your tax debt. Collection actions are the IRS’ attempts to collect the back taxes you owe. IRS collection actions begin with notices and end with the seizing or selling of your property and assets.

Fact: 98% of all tax revenue the IRS collects is paid timely and voluntarily.

The IRS considers you to be delinquent if any amount of your taxes is left unpaid after the filing deadline. Any amount of unpaid taxes can attract IRS collection actions if you make no real effort to pay your tax debt, especially after the IRS has sent multiple notices regarding the payment.

Substitute for return

When you don’t file a tax return, the IRS may file for you with what is called a “Substitute for Return” to determine the amount you owe. The substitute for return is the IRS’ estimation of what you owe using information from past returns and income reported to the IRS by your employer(s).

When filing a substitute tax return, the IRS does not take responsibility for including every deduction or credit that you may qualify for. Consequently the IRS’ estimations of your tax debt are usually pretty high. For the IRS, the purpose of filing a substitute tax return is to make an estimate of the tax debt so that they can begin collection actions. You can always go back and file an amended tax return to correct the amount you owe.

IRS notices

The IRS begins the collections process by sending notices in the mail. These notices include the amount of tax debt, how the tax debt was incurred, and the deadline to pay it. Although the IRS wants taxpayers to pay the entire tax debt in a single payment, you do have various options to resolve your back taxes, which could include receiving a reduction in tax debt, getting penalties removed or reduced or even postponing payment.

If, after receiving multiple notices from the IRS regarding the payment, you still do nothing to initiate resolution like applying for an IRS payment plan or contacting the IRS for help, the IRS sends the final notice CP90 – Final Notice of Intent to Levy and Notice of Your Right to a Hearing. After this last notice, no more notices are sent.

Federal tax lien

A Federal Tax Lien is the IRS’ claim to everything that you own and anything that you may own in the future while the lien is still in place. A lien is the IRS’ way of telling other creditors that when it comes to paying debt, they are the first in line.

The IRS can place a tax lien at any time during the collections process, but generally, the IRS only places liens on tax debts of $10,000 or more.

Pop Quiz

How many federal tax liens did the IRS file in 2013?

a) Around 125,000

b) Just under 260,000

c) A little more than 500,000

d) Just over 600,000

Reveal Answer

The IRS actually filed 602,005 federal liens in 2013

d) Just over 600,000

Return to question

Federal tax liens limit your ability to get credit and can lower your credit score by as much as 150 points. They can also stop you from getting security clearance or certain professional licenses.

Tax levy

A tax levy is the legal seizure of your property or assets to satisfy your tax debt. The IRS has the power to levy your financial accounts as well as garnish your wages (called a wage levy). This means the IRS can take the funds in your bank account or take a portion of your paycheck each pay period. This includes, and is not limited to, retirement accounts, dividends, rental income, accounts receivables, or commissions.

The IRS can also seize and sell your physical property such as your car, house, or equipment. Generally, the IRS will only seize your physical property as a last resort.

For successful back taxes resolution, it is important that you begin resolution efforts as early as possible. Not only will it help you to avoid IRS collection actions, but will also assist them to minimize IRS penalties and interest that adding to the tax debt every month. To handle back taxes, do not wait for the IRS to take action.