CARL WATTS & ASSOCIATES

May 02, 2016

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The Tax Collection Process
In recent newsletters we’ve dealt with late filing penalties and interest and tax payment options. It is now the time to dive a little into the tax collection process.

If, for any reason, you failed to file and/or pay your taxes, the IRS will send you a bill.

Along with the bill, which is called a notice, the IRS automatically sends Publication 1, Your Rights as a Taxpayer, and Publication 594, Understanding the Collection Process. These publications explain the various options and rights taxpayers have in dealing with the IRS. The IRS points out that every taxpayer has the right to prompt service and to be treated fairly, professionally, and courteously by IRS employees. The IRS has trained its collection personnel to ensure that taxpayer rights are protected and respected according to the Internal Revenue Code and the Taxpayer Bill of Rights.

If you do not pay in full when you file your tax return, you will receive written notice of the amount you owe, a bill. This bill starts the collection process, which continues until your account is satisfied or until the IRS may no longer legally collect the tax; for example, when the time period for collection has expired.

The first notice you receive will be a letter that explains the balance due and demands payment in full. It will include the amount of the tax, plus any penalties and interest added to your unpaid balance from the date the tax was due. You may pay the amount due by sending the IRS a check or money order, payable to the United States Treasury, with a copy of the notice.


If you cannot pay in full, you should send in as much as you can with the notice. The unpaid balance is subject to interest that will compound daily and to a monthly late payment penalty. It is in your best interest to pay your tax liability in full as soon as you can to minimize additional charges.

The IRS also encourages you to investigate and consider other methods of financing full payment of your taxes, for example by obtaining a cash advance on your credit card or a bank loan because the interest rate and any applicable fees your credit card company or bank charges may be lower than the combination of interest and penalties imposed by the Internal Revenue Code.

If you are unable to pay what you owe or you question the accuracy of the tax bill, you should contact the IRS as soon as possible. Call the IRS at 800-829-1040 to discuss any IRS bill. You should have the bill and your records with you when you call.

There are a number of payment solutions the IRS may be able to offer, including:

  • Extension of Time to Pay — Taxpayers may be eligible for a short extension of time to pay of up to 120 days. Taxpayers should request an extension if they would be able to pay their taxes in full within the extended timeframe.
  • Installment Agreement — Installment agreements paid by direct deposit from a bank account or payroll deduction from wages will help avoid agreement default by ensuring timely payments and will reduce the burden of mailing payments and save postage costs.
  • Delaying Collection — If the IRS determines that a taxpayer is unable to pay, it may delay collection until the taxpayer's financial condition improves.
  • Offer in Compromise — Some taxpayers are able to settle their tax bill for less than the amount they owe by submitting an Offer in Compromise (OIC).  However, the criteria for accepting an offer are strict and relatively few offers are accepted each year.

If you do not contact the IRS, they may take action to collect the liability, such as:

  1. Filing a Notice of Federal Tax Lien,

  2. Serving a Notice of Levy, or

  3. Offsetting a refund to which you are entitled.

The Federal Tax Lien is a legal claim to your property, including property that you acquire after the lien arises. The federal tax lien arises automatically when you fail to pay in full the taxes you owe within ten days after the IRS sends their first notice of taxes owed and demands for payment, and makes an assessment of the tax.

The government also may file a Notice of Federal Tax Lien in the public records. The Notice of Federal Tax Lien publicly notifies your creditors that the IRS has a claim against all your property, including property acquired by you after the Notice of Federal Tax Lien is filed. The filing of a Notice of Federal Tax Lien may appear on your credit report and may harm your credit rating. Once a lien arises, the IRS generally cannot release the lien until the taxes, penalties, interest, and recording fees are paid in full or until the IRS may no longer legally collect the tax.

The IRS will withdraw a Notice of Federal Tax Lien if the Notice was filed while a bankruptcy automatic stay was in effect.

The IRS may withdraw a Notice of Federal Tax Lien if the IRS determines that (1) the Notice was filed too soon or not according to IRS procedures; (2) you enter into an installment agreement to satisfy the liability unless the installment agreement provides otherwise; (3) withdrawal will allow you to pay your taxes more quickly; or (4) withdrawal is in your best interest, as determined by the National Taxpayer Advocate, and the best interest of the government.

The IRS also may use a levy to collect taxes. The IRS may levy assets such as wages, bank accounts, Social Security benefits, and retirement income. The IRS also may seize your property for the purpose of selling the property to satisfy a tax debt including your car, boat, or real estate. In addition, any future federal tax refunds or state income tax refunds that you are owed, may be applied to your federal tax liability.

When the IRS sends you a bill, if you do not respond to the first notice or subsequent notices, the account becomes delinquent. 

Delinquent accounts may be turned over to the Automated Collection System (ACS) or to the Collection field function. ACS personnel will contact you by telephone to attempt to work out an agreeable payment solution. If the delinquent account requires field contact, a revenue officer will try to resolve the account with you.

The IRS wants to help taxpayers work out an appropriate payment solution. If the taxpayer does not cooperate, the IRS may take enforced collection action. Enforcement action could include serving a notice of levy to attach taxpayer income or assets such as bank accounts. In some cases, the IRS will take enforcement action by seizing and selling property. The IRS takes these actions only after giving the taxpayer an opportunity to voluntarily pay the debt, make arrangements to pay, or supply information to show that payment would create hardship. 

If the IRS pursues enforcement action, the taxpayer still has options. After the IRS files a Notice of Federal Tax Lien, and prior to the Service initiating levy action, a taxpayer is given the opportunity to request a hearing with the Office of Appeals. The taxpayer also has a right to appeal certain other collection actions. For example, if the taxpayer’s request for an installment agreement is denied, the taxpayer has a right to appeal that determination. Each taxpayer subject to enforcement action receives Publication 1660, Collection Appeal Rights. This publication explains a taxpayer’s right to make an appeal and the procedures for requesting an appeal.

At any time before or during collection action, a taxpayer who believes a pending collection action will create a significant hardship may apply for relief by submitting Form 911, Application for Taxpayer Assistance Order (ATAO). The Office of the Taxpayer Advocate will review the application, and if appropriate, take steps to resolve the taxpayer’s problem with the IRS to relieve the hardship.

The worst thing you can do is do nothing at all! Call the phone number on the letter the IRS sent you if you cannot pay your taxes. You will need to give the IRS complete financial information, so make a list of your monthly expenses and income before you call and be prepared to discuss those with the IRS. Make sure you include: medical costs, transportation costs, housing costs, other expenses that you don’t pay every month, extraordinary circumstances (such as life-changing events).

If the IRS agrees that you can’t pay, it may suspend collection action and classify your account as currently not collectible (CNC). CNS does not mean the debt goes away, penalties and interest will continue to accrue, and the IRS may collect against you in the future if your financial situation improves.

Once again, the most important thing is to contact the IRS as soon as they begin sending you letters requesting payment. Make arrangements to pay the taxes you owe and, of course, contact your tax professional to help you in all your dealings with the IRS.
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