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Understanding the IRS Collections Process » Get Out of Tax Debt » Understanding the IRS Collections Process



Facing IRS collections is some of the worst financial stress you can face. If you don’t pay the IRS what you owe, they can seize your assets, garnish your wages and place liens on your property. But the good news is those heart-stopping effects can be easily avoided as long as you communicate with the IRS. Even if you can’t afford to pay what you owe, there are still steps you can take to ensure the IRS doesn’t use their most severe collection actions against you. Here’s what you need to know about the IRS collections process and how to avoid the worst of it.

When does the collection process start?

The IRS considers a taxpayer to be delinquent if any amount of taxes owed are left unpaid after the filing deadline. Any amount of unpaid taxes can attract IRS collection actions. However, the worst outcomes only occur if you make no real effort to pay what you owe. The IRS will be especially harsh if you attempt to hide and avoid contact entirely.

Immediately after the income tax filing date for that year – usually April 15 – the IRS will begin to apply penalties and interest to any unpaid balance that you owe. Penalties will continue to accrue until your back taxes are paid in full. Even filing a tax extension won’t stop penalties if you owe money. It will help you avoid IRS collections, but penalties will be applied from the original filing deadline.

How IRS collections work

  1. If you owe a balance to the IRS, they will send you a first notice of taxes owed. This will outline what you owe and provide instructions for payment.
  2. From the date you receive that letter, you have ten (10) days to pay the stated balance in full.
  3. If you don’t pay the full balance back within that time, a statutory federal tax lien> is automatically issued, and the IRS may place a Notice of Federal Tax Lien in public records at any time.
  4. The IRS will continue to send you collection letters with instructions. Each letter will include:
    1. the amount owed
    2. a summary or how the tax debt was incurred
    3. a deadline to repay it
  5. If you ignore all contact attempts, the IRS will send one final notice called the Final Notice of Intent to Levy and Notice of Your Right to Hearing. After this notice, the IRS will take action to force repayment. This can include:
    1. Wage garnishment
    2. Levying any monetary assets, such as your bank accounts, social security benefits and retirement income
    3. Seizing property, which includes your home, cars, investment properties and anything else they can sell to satisfy your tax debt
    4. Intercepting all future federal tax refunds and state tax refunds

Don’t wait for the IRS to force collection through wage garnishment and liens. Take action now to solve problems with back taxes.

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Substitute for return: Why you can’t just avoid filing to avoid collections

If you don’t file a tax return, the IRS may file for you with something called a Substitute for Return to determine the amount you owe them. A substitute for return is the IRS’ estimation of what you owe for that year.  They use past returns, as well as income reported by your employer(s) to approximate your return and how much you owe.

When filing a substitute for return, the IRS will not take responsibility for including every deduction and credit that you may qualify for that year. Consequently, the estimations are usually pretty high. The purpose of the substitute tax return is to make an estimate of how much you owe so they can begin collection actions.

This is another reason that you don’t just want to avoid filing to try and avoid paying. Not only will the IRS apply a stiff failure-to-file penalty, but they’ll estimate what you owe so they can collect anyway.

Filing an original tax return to reduce your liability

If the IRS files a substitute return on your behalf to estimate what you owe, contact a licensed tax attorney immediately. You are permitted to file an original tax return to correct the amount you owe. This will reduce your initial liability, which in turn, will reduce the amount you owe.

What you can do to avoid having your assets seized

Penalties, interest and federal tax liens on your property are unavoidable if you owe a balance to the IRS. However, levies can be avoided simply by maintaining open communication with the IRS. You won’t have to deal with wage garnishment, drained bank accounts, or seized assets – even if you can’t afford to pay now.

What to do if you can’t afford to pay everything

If you can’t afford to pay your tax bill in full all at once, you have two options:

  1. An installment agreement is a tax repayment plan that sets up monthly payments to pay off the amount due. It breaks the amount you owe into affordable installments that you can pay each month.
  2. The other option is an Offer in Compromise. This is the IRS version of debt settlement. They review your assets and budget to see what they can reasonably expect to collect from you. You end up paying back a percentage of what you owe, and the remaining balance is discharged.

Once you pay off your balance in full, the federal tax lien will be released.

What to do if you can’t afford to pay anything

If you’re living paycheck-to-paycheck and don’t have the means to pay anything to the IRS, just let them know that. You can file for Currently Not Collectible (CNC) status, which basically indicates that you don’t have the means to make any payment on your tax debt. The IRS will review your income and budget to confirm you really can’t pay. Then they will cease all collection actions. Penalties will continue to accrue. However, you won’t need to worry about levies or wage garnishment.

The IRS will routinely review your finances to determine when you have the means to pay them back. Once they see that you have the means, collections will start again if you don’t make arrangements for repayment.

IRS Collection Process FAQ

How does the IRS find all your properties for the purpose of a tax lien?

The IRS does not go through the process of seeking out all your properties individually for a federal tax lien. Ten days after the IRS sends you the first notice of taxes owed with a request for repayment, the federal tax lien arises automatically; however, the Federal Tax Lien will not be shown in public records to be enforced until a formal Notice of Federal Tax Lien is issued with appeal rights.

Since the federal tax lien is a matter of public record, it applies to all assets that you own. Even if you acquire an asset after the lien is issued, the lien applies to that property as well. If you attempt to sell, the lien will be flagged in the sale. It’s basically the IRS’ way of ensuring they get the proceeds from the sale of any of your assets.

Does the IRS ever attempt to collect by phone, email or text?

In the past, the IRS handled all collections internally and never contacted taxpayers by phone. This was an easy way to spot IRS collection scams because they never attempted contact outside of these official letters. However, when Congress passed the Fixing America’s Surface Transportation (FAST) Act in 2015, it authorized the IRS to use private collection agencies.[1] The idea was to generate more tax revenue to fix America’s roads by using private debt collection firms to contact taxpayers who aren’t paying their bill.

As a result, you may now receive phone calls from third-party debt collectors that have been contracted by the IRS. If the IRS refers you to a third-party agency, they will send you a letter letting you know the collector will be contacting you. The letter will include an authentication number that the collector must provide at the beginning of any collection call to verify that they are legitimate. The collector will also send you a letter or email with that authentication code.

These private collectors will never take money directly and will always direct you to send payments directly to the IRS. They can use phone, email, and text to attempt to contact, but they cannot use robocalls. Make sure to request the authentication code to verify you’re not being contacted by a scammer!

Talk to a licensed tax professional to find the right solution for your unpaid tax debt.

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