IRS back taxes — what is the big picture of the collection process?
The purpose of this article is to give you a nice overview of the process when the IRS says you owe taxes. We have helped consumers all over deal with the IRS collection of back taxes. One thing that is consistently true is consumers/taxpayers don’t know the process and don’t know their rights.
In future articles, we will go deep into details such as Federal Tax Liens, Federal Tax Levies, Solutions to Back Taxes, etc.
But for now, let’s get a good idea of what the overall collection process is all about.
(Disclaimer — do keep in mind there are always exceptions so you must do your own research and have a tax professional [lawyer, CPA, or enrolled agent] explain to you in your unique circumstance what your options are. This article is to get you started, not to be the end of your research.)
Here is a list of our topics — each topic will have a heading so you can jump to whatever you want to know:
- How many consumers are in the IRS collection division or soon will be?
- How do consumers get into trouble with the IRS collection division?
- Can you avoid the IRS by not filing tax returns?
- What does the IRS want if you have not filed your tax returns?
- What are the names of the notices that you can receive from the IRS?
- Why is it critical to file a Form 12153 within 30 days of the Letter 11 — what critical legal rights do you lose by not doing this?
- Is there a statute of limitations that applies to the IRS and how does this work?
- What is a Federal Tax Lien and what has to happen before it is effective?
- What is a Federal Tax Levy and why are these more dangerous to you than a Tax Lien?
Let’s get started…
How many consumers are in the IRS collection division or soon will be?
At last count, it was about 13 or 14 million Americans. These are the folks in the collection division.
There are maybe 7 million or more consumers who the IRS has identified as needing to file tax returns. But they have not filed returns yet.
Almost everyone who fails to file a federal tax return owes money so we can safely estimate over 20 million consumers are currently or will shortly face the wrath of the IRS collection division.
Add to this the massive economic disruption caused by COVID-19, and we fully expect this number to skyrocket. There are many small business owners desperately trying to survive the economic shutdown. Some will give in to the temptation to not pay payroll taxes, for example. Others will not make their estimated quarterly payments.
The bottom line is a massive number of Americans owe money to the IRS and this number will skyrocket with the current economic hardship.
How do consumers get into trouble with the IRS collection division?
There are basically two ways.
Filing a tax return and not paying the money owed.
Or not filing a tax return. When you don’t file a tax return the IRS does one of two things.
First, it will force you to file one.
Or, second, if you don’t file a return, the IRS will file a “substitute for return” (SFR). Alternatively, the IRS can force you to show up with your records and the IRS officer will create a return for you.
It is no shock that when the IRS creates a return (primarily through an SFR) that you will owe money to the IRS. Normally, a lot of money.
And we’ll talk in other articles about the penalties that occur when you don’t file a return (up to 25%) penalties on not paying the taxes when they are due.
Can you avoid the IRS by not filing tax returns?
No. As mentioned above, if you don’t file your tax returns this only leads to the IRS filing one for you. Normally this is called a “substitute for return” and you will end up owing lots of money to the IRS.
And you will get nailed with all sorts of interest and penalties.
It is mission-critical to file your returns to avoid this and to start the statute of limitations running on the IRS so you can eventually be free of having to pay back taxes.
Oh one other thing — if the IRS creates an SFR (substitute for return), the tax assessed from this can never be discharged in bankruptcy.
What does the IRS want if you have not filed your tax returns?
It wants you to file your back tax returns and pay back taxes.
Everything the IRS does is guided by this — what will it take to get this tax payer to file their returns and pay the amount owed?
Think of all the scary things the IRS can do — levies, tax liens, summon you by subpoena, penalties, interest, etc — these are all designed to get you to file your returns and pay the money owed.
What are the names of the notices that you can receive from the IRS?
Here’s the overview and then we’ll dive into the actual notices.
First, the tax is assessed. This means the IRS determines how much you owe. This could be from a return you file or one the IRS files for you.
Second, you get notified by the IRS of the assessment and you don’t pay it.
Third, what is known as the “silent tax lien” arises automatically and attaches to every asset you own. (Most think a notice of federal tax lien has to be filed but this is not true — instead when you don’t pay the assessed tax, the lien is created).
Fourth, you receive the final notice (after getting several) that the IRS intends to levy your income and assets. This means the IRS will seize your actual money, income, assets, etc. This is much worse than a notice of federal tax lien. And this is your opportunity within 30 days to request a “collection due process hearing” which is absolutely vital to do.
Fifth, the notice of federal tax lien is filed in the public records. This notifies your creditors and others that you owe this money to the IRS and it will impact you selling or refinancing property such as your home.
Sixth, if you do not file the appeal (and less than 3% do) then the IRS will seize or levy your income and assets.
The solution is to know your rights and take action which we will get to in this article and others.
Here are the notices.
CP-501 which simply says you owe money on one or more tax returns.
CP-503 is the notice that basically says, “We haven’t heard from you and you still owe money.”
CP-504 is the notice that says it is an intent to levy (seize) your assets to pay your back taxes. By this point, the IRS figures you have ignored two other notices so the tone has definitely changed.
Letter 11 (sometimes it is Letter 1058 or CP-90) is a form that says “Notice of Intent to Levy”. So you have been warned by the CP-504 but now things have reached a critical stage. There will be a blank form 12153 which is a “Request for a Collection Due Process or Equivalent Hearing” which you must send in within 30 days and request a hearing. If you don’t, then the IRS can start levying your assets and income which is devastating. And you lose your rights if you don’t submit the form in time.
Why is it critical to file a Form 12153 within 30 days of the Letter 11 — what critical legal rights do you lose by not doing this?
If you do properly invoke the collection appeal (form 12153), then good things will happen:
- The IRS has to stop all collection activity (but not a notice of federal tax lien) for whatever years you have filed the appeal on
- Your case goes to the Appeals department
- If you cannot work it out with the IRS in Appeals, you have the right to go to Tax Court
- And you, as a practical matter, have some time to file missing returns and you will have time to discuss settlement options.
The latest statistics are that only 3% of taxpayers exercise their right to appeal. This is because taxpayers and their accountants (CPAs, etc) don’t know how to do this or do not understand the importance of filing this appeal.
Let me repeat — it is vital to exercise this right unless you have a great reason not to which is not the case for most folks facing the wrath of the IRS.
Is there a statute of limitations that applies to the IRS and how does this work?
Yes. A statute of limitations in lawsuits (for example debt collection lawsuits) is the time period your creditor or debt collector has to sue you. If they wait too long, and let the time period expire, you have an absolute defense to the lawsuit.
Same thing with the IRS but the IRS normally does not sue. (They can but it is not the normal way of collecting).
The IRS takes collection actions against you and they must do this in the statute of limitations.
It is 10 years from the date of the assessment of the taxes.
A couple of thoughts for you:
- It is the assessment that triggers the clock running. So if you don’t file a return for a few years, you have extended the time the IRS has to collect on you.
- There are things you can do to extend the statute of limitations beyond 1o years. When you file an offer in compromise, file a collection due process hearing request, ask for an installment agreement, or file bankruptcy, this adds time to the 10 years. (Bankruptcy actually adds the time you are in bankruptcy and then you add on an additional six months).
Here’s the theory on why time is added. If you do something that ties the hands of the IRS in collection, then it would not be fair for the clock to still be running. So if the IRS is frozen from taking action against you, so is their time period to collect.
Final thought — anything you do with the IRS that can extend the statute of limitations needs to be carefully considered. We see folks file silly offers in compromise that have no chance of being accepted. All this does is give the IRS even more time to hammer you.
So choose carefully what you do — understand the consequences of each move you make with the IRS.
What is a Federal Tax Lien and what has to happen before it is effective?
So let’s talk about federal tax liens in a couple of ways.
First, these liens arise automatically when you don’t pay the assessed tax. This can be months before the notice of federal tax lien is filed. Many consumers and accountants mistakenly believe there is no lien until the notice of lien is filed in probate court. This is wrong.
The lien “silently” and “automatically” attaches to your assets. All of your assets now and in the future.
Second, when the notice of federal tax lien is filed this is to give notice to the world that you owe money. It puts the IRS in line for your assets (typically your home). It does not leap ahead of your mortgage and other legitimate liens that occur before the notice is filed, but anything after would be behind the IRS.
And wherever the IRS is in line, you can’t refinance or sell your home unless the IRS agrees to it.
So when does a lien happen? Simple — when you don’t pay the amount owed. This is what most people fear the most — getting the dreaded notice of federal tax lien. But honestly this is much better than what we will talk about next — the levy. The levy is what should strike fear in you.
What is a Federal Tax Levy and why are these more dangerous to you than a Tax Lien?
A levy is where the IRS takes your stuff. What is your “stuff” — what does it include?
It is your wages.
Your bank accounts.
Even your retirement accounts sometimes.
Before you can get hit with this devastating weapon, you normally have to have received notice of your right to a Collection Due Process hearing. This will mainly be done through an IRS Letter 11 (or Letter 1058 or CP-90).
And then you don’t pay your taxes or you make an agreement and then break that agreement.
There are two types of Levies — Regular and Continuing
A regular levy seizes whatever you own at the moment the levy is delivered. So if you have $5,000 in your bank account on April 13 and the levy hits that day for $10,000, the $5,000 will be seized.
But if on April 14 you deposit $100,000, that money is normally not subject to the levy.
A continuing levy is what it sounds like. It is a levy on an employer or a contractor who pays you, etc. and it continues to grab any money you are entitled to or that you own. Mainly this is used to get your wages or commissions.
How does a regular levy work on a bank account — when do I lose the money?
When the bank is hit with a regular levy, it will hold the money for 21 days before sending it to the IRS. If you don’t take immediate action, you will lose this money. But you can take steps to get the levy or some portion of released normally. We will talk about these in another article.
If I’m hit with a continuing levy, does the IRS only take 15 or 25 percent of my wages or commission or is it more?
Sadly it is normally more. Basically the IRS will leave you the annual standard deduction (right now about $12,200) and take everything else. And this is done on a per pay period. Let’s look at an example.
You get paid $6,000 a month. The annual standard deduction is $12,200 so the IRS will divide this into 12 which is about $1,016 a month that you can keep. The IRS would take the rest of your paycheck.
This is why I say the levy is much more damaging than a lien.
So in a lawsuit by a debt collector context, the garnishment of your bank accounts and wages (although capped at 25%) is much worse than a simple judgment lien on your property.
Same thing here — when you get levied, you are wiped out.
Now you often can persuade the IRS that you are truly taking steps to get right and you need money to pay your mortgage. Maybe they will take mercy on you. This is where it helps to have a professional as most folks cannot survive with bank accounts wiped out and barely making any money as the IRS is taking almost all of your paycheck.
Don’t ever let your situation get to a levy and if it does, take immediate action to fix this.
OK so what do you do right now?
You need to know where you are in the process. Which notice are you at? How much do you owe?
Open all of your mail! You must know what is happening. Ignorance is not bliss — ignorance leads to bank accounts being wiped out.
Give us a call at 205-879-2447 and we can help you evaluate your options and help you pick the right path going forward.
Ask for Carolyn and give her the answers to these questions or you can fill out the form below. Either way, the information will go straight to me from Carolyn or from your answers to the form below.
Here are the questions we need answers to in order to help you
**How much do you believe you owe the IRS?
**Are all of your returns filed or do you have unfiled returns — and which years are not filed?
**Have you opened all of your mail from the IRS?
**Which letters and notices have you received from the IRS?
**Have you filed a Form 12153 to get a Collection Due Process hearing?
**Have you hired anyone to help you negotiate with the IRS and do they still represent you? If they do, we cannot help you. If they don’t represent you, we still need to know what they did for you.
**What are the questions or concerns you have about the IRS that you want answered right away?