IRS Collections: A Primer
The focus of my practice is taxpayer representation. As with any endeavor, knowledge is power. Understanding a bit about how IRS collections works will hopefully help guide you through the process and alleviate unnecessary stress and anxiety.
At present, the IRS has over 14,000,000 accounts in collection. If you, or your business, are one of them you have a lot of company.
STEP BY STEP
The first step in the process is the filing of a return. This can be accomplished by either the taxpayer or, should he/she choose not to the file, by the IRS filing what is called “a substitute for return”, or SFR. Once a return is filed the tax is assessed.
Next, if the tax is not paid, the IRS will issue a billing notice. In addition, a “silent lien” will arise under the law, attaching to all your owned and even later acquired assets.
Should you, like many others, choose not to open the mail from the IRS, a final Notice of Intent to Levy your income and assets will be sent (usually via certified mail) and you’ll have 30 days to request a collection “due process” hearing.
The IRS will also file a “Notice of Federal Tax Lien” in your local public records if you owe more than $10,000. Suddenly, you’ll get even more mail coming from the (mostly) fly-by-night national tax help companies and what’s left of your credit score will be destroyed.
Assuming you don’t exercise your appeal rights (less than 3% of taxpayers do) the IRS will start seizing your assets including your bank accounts and garnishing your wages. If you really want to be embarrased at your bank and at work there’s no better way.
Stop The Madness
At this point, the pressure of being between a rock and hard place will start to be applied. Unless you like playing this game it’s time to follow the rules. If you haven’t been filing your returns you must be in compliance before the IRS will talk with you. “Compliance” means having the last 6 years of returns filed. Next, you need to show that you’re currently paying the taxes due for the present year. This can mean several things depending on your facts and circumstances. If you’re getting a W2 as an employee the IRS will want to see that the tax withholding is sufficient, in the sense that you’re paying enough tax to cover the current year’s liability. If you are self-employed they’ll want to see that you’re making your quarterly estimated tax payments. If you are a business and have payroll you better be making your payroll tax deposits.
Once you’re current, however, it’s not time to pay your back taxes. It’s time to make the right decisions first.
Now that you’re up to speed with tax filings and payments for the current year it’s time to see which payment alternatives are best for you.
Perhaps you don’t have the income or assets from which to pay your back taxes. It’s all you can do to stay current. In this case, the IRS could deem you to be “Currently Not Collectible”, or CNC. Realizing they can’t get blood out of a stone they will agree to suspend collection activity until your financial situation improves.
Another possible solution is to request an “Offer-in-Compromise”. The IRS can agree to settle your combined debts for an amount based on a formula known as “Reasonable Collection Potential”. I repeat: this is a formula based on your net asset values and your future income. Many factors go into coming up with your net assets and income potential and I would never advise anyone to attempt to obtain an offer without competent professional help – like the kind I offer. It’s very complicated.
Finally, the IRS may be willing into an installment agreement, a form of payment plan, in which you make monthly payments towards your back taxes, penalties and interest. There are 3 types of intallment plans: regular, streamlined, and partial-pay. Your case will determine which of the 3 alternatives is best for you.
So, there you have it. If you’re in a situation in which you’re behind on your taxes, in collections or both, I can help. You’ll feel better, your wallet will feel better, and the IRS will stop bothering you.
Terrence J Power CPA