As tomorrow is the due date for individual tax returns on extension, I wanted to expand on my previous blog post on how IRS collection works. Whether you live in Severn, MD or Anne Arundel County, MD or anywhere else in the world, the IRS collections process works the same. The focus of my practice in Severn, MD is to help taxpayers get in compliance with their IRS and state tax filings and to represent them before the IRS and the state with their tax collection issue.
An overview of the IRS collection process is as follows:
- You File Your Tax Return
Depending upon whether you’re filing for yourself as an individual or for your business or for some other entity such as a trust, and also depending upon whether you’re filing “timely” or on extension, your tax return is due somewhere between March 15 and October 15 for a calendar year. If you file your return and pay all the tax due at the time you file or, better yet, have a refund coming your way on that filing, you’re done!
- Your Tax is Assessed
If you file your tax return and aren’t able to pay the full amount due, the IRS will assess the tax owed when your return is received and has been processed.
- IRS Sends Notices & Demands for Payment
The time to process your return and to assess the amount due is quick since these tasks are mainly performed by the IRS computers. If you have an amount due on your filed tax return, you’ll receive a billing notice in the mail requesting payment of the tax plus penalties and interest.
- Gov’t files Tax Liens on your property (req’d by statute/law)
If your tax bill goes unpaid after receiving the first notice of amount due from the IRS, then a silent lien on your property arises by statute. The lien attaches to not only the assets you now own but also those that are later acquired.
- Notice of Federal Tax Lien (NFTL) filed if owe > $10,000
When your tax bill due exceeds $10,000, the IRS will file a Notice of Federal Tax Lien in the public records that puts other creditors on notice of your debt. Keep in mind, though, that a lien is NOT a levy (seizure)—the government hasn’t taken anything from you but is just protecting its interest or its right of priority on your assets over other creditors.
- Final Notice – 30-Day Appeal period begins
Assuming that you still haven’t paid your amount due, a final notice of the IRS’s intent to levy on your income and assets is mailed to you. This “30-day” letter begins the statutory 30-day window for you to request a collection due process hearing. You have 30 days to appeal the collection action against you. If you don’t believe you owe the tax amount assessed against you, this is NOT the time to stick your head in the sand! Take advantage of your rights.
- Levies issued
If you don’t file an appeal during the 30-days after you receive your final notice, and you still haven’t paid your amount due, the IRS will begin seizing your assets…and this process is completely legal. The government is not lenient when back taxes are owed and when taxpayers aren’t making an effort to either pay them or to appeal them, so it has given the IRS the means to collect the tax debts owed to it. This high degree of collection authority allows the IRS to garnish your wages, clean out your bank accounts and seize your property (cars, boats, houses, etc.). This process of enforced collection will continue until you seek to resolve it on your own or, preferably, with the help of a tax professional.
There are 3 steps to resolving your tax debt with the IRS:
Step 1: Get Compliant with Tax Rules
Before you’re able to begin negotiating with the IRS, you have to be compliant with the tax rules.
- The first thing you need to do to get compliant is to file your tax returns.If you haven’t filed in several years, “filing compliance” means that you’ve filed returns for at least the past 6 years. You just have to file the returns; the tax doesn’t have to be paid…yet.
- The next requirement in order to be considered tax compliantis to have paid your current year taxes. If you’re an employee, this means that you’re having taxes withheld from your paychecks. If you’re self-employed, it means that you’ve been making your quarterly estimated income taxes based on your business net income. If you have a business with employees, you will need to have made your current quarter payroll tax deposits.
- Being compliant doesn’t require you to pay off old tax debts so hold off on throwing money at those for right now.
Step 2: Contact the IRS
Contacting the IRS is the next step and it allows you to start negotiations.
- If you’ve called the IRS anytime during the last few years, you’ll already know that getting a person on the phone isn’t an easy thing to do and that it requires lots of time and patience. If you received an IRS notice then you should call the number on the notice. This will be the quickest way to speak with the IRS representative who can help you. Otherwise, there are a couple of main numbers that you can use in reaching the IRS:
- For Individuals: 1-800-829-1040
- For Businesses: 1-800-829-4933
- If you value your time and money, and you want the best outcome, you should have a tax representation specialist contact the IRS for you.
- Whether you or your representative make the call, the IRS needs to know that you’ve filed (or that you’re in the process of filing) your missing returns for the past 6 years and that you’ve made your current tax payments (whether as an employee, a self-employed person or a business). Last, but not least, the IRS needs to be told that your goal is to make a proposal toward resolving your tax debt.
Step 3: Propose a Tax Resolution to the IRS
Once you make the call to the IRS, you’ll probably be pleasantly surprised to find that you’ve reached an someone who’s more than willing to work with you in resolving your tax debt. Depending upon your amount owed and upon the current phase of the collection process against you, you’ll be given assistance just by making the effort to call. This assistance may be extra time to get in tax compliance and possibly even a hold on levy action during that time. This is where a tax resolution specialist can greatly benefit you. Before the IRS will consider any of the resolution options available to you, a Form 433 “collection information statement” will need to be prepared. Based on the results shown on this statement, you’ll have one or more tax resolution options including:
- Currently-Not-Collectable (CNC) – This is also called Uncollectible Status and basically means that you’re not in a position right now to be able to pay anything at all toward your tax debt.
- Offer in Compromise–This option is also based on your inability to pay in full and is where you make an offer to settle the debt for less than the amount you owe.
- Installment Agreement – These are payment plans that allow you to pay either the full amount or a partial amount of your tax owed. Depending upon the results of your collection information statement as well as upon the total amount owed and the time left over which the IRS can collect from you, there are 3 types of payment plans:
While there are several options available to you when you owe taxes to the IRS or to the state, navigating the maze of IRS forms and requirements when you have a collection issue can be confusing at best and potentially nerve-wracking or frightening. If you need help getting in compliance with your IRS and state tax filings and in dealing with your tax payments due in Severn, MD or elsewhere, please contact my firm at:
Lisa D Church, CPA, EA, MBA
7865 Clark Station Rd
Severn, MD 21144