The IRS Collection Process

If you do not pay your taxes when you file your tax return, you will receive a bill, in the form of a Letter or Notice, for the amount you owe. The amount you owe is referred to as a tax liability. This bill starts the IRS collection process, which continues until your account is paid in full and satisfied or until the IRS may no longer legally collect the tax from you. For example, there is a limited period of time in which the IRS may collect the taxes owed and this collection period may expire before your account is fully satisfied.

The federal government imposes several different types of taxes on its citizens in order to run the many departments within the government. Most of us are familiar with income taxes, but other federal taxes include gift taxes, estate taxes, and employment taxes.  Therefore, you may receive a Notice or Letter for unpaid income taxes as well as a Letter for unpaid payroll taxes.

You may receive a Letter from the IRS

The first bill you receive is called a Letter. The Letter explains the balance due and demands payment in full from you immediately.  The Letter will also explain the reason the IRS believes you owe taxes and the Letter will provide instructions on how to handle the issue. The Law Office of Robert Thomas will need a copy of the Letter as quickly as possible once you receive it to best assist you.

The Letter will include the amount of the tax due, plus any penalties and interest accrued on your unpaid balance from the original due date.  The unpaid balance is subject to interest that compounds daily in addition to a monthly late payment penalty.

The IRS sends Letters for the following reasons:

  • You have a balance due.
  • You are due a larger or smaller refund.
  • The IRS has a question about your tax return.
  • The IRS needs to verify your identity.
  • The IRS needs additional information.
  • The IRS made a change to your return.
  • The IRS needs to notify you of delays in processing your return.

Keep a copy of your Notice or Letter

It’s important to keep a copy of all Notices or Letters you receive along with your tax records. You may need these documents at a later date. Do not throw away any documents you receive from the IRS.

The Notice or Letter Number

You can find the Notice (CP) or Letter (LTR) number on either the top or the bottom right-hand corner of your correspondence.  This reference number is important because it references the specific Letter.

Act Quickly Once You Receive a Letter from the IRS

If your Notice or Letter requires a response by a specific date, there are two main reasons you’ll want to comply:

  • To minimize additional interest and penalty charges, and
  • To preserve your appeal rights if you don’t agree.

It’s important to make arrangements to pay the tax due voluntarily and as quickly as possible. You do not want the IRS to pursue further actions against you. It is also important to contact the Law Office of Robert Thomas to provide time to respond appropriately to the IRS and to stop further collection actions. If you are unable to pay the IRS voluntarily and immediately, the IRS will take action to collect the taxes. For example:

  1. Filing a Notice of Federal Tax Lien
  2. Serving a Notice of Levy, or
  3. Offsetting a Refund to which you’re entitled

If you agree with the information in the Letter and you are able to pay the taxes in full immediately, all you need to do is contact the IRS for further payment instructions.

Interest and Penalties Immediately Begin Accruing

It is in your best interest to pay your tax liability in full as soon as you can in order to minimize the penalty and interest charges. There are methods of financing the full payment of your taxes, such as obtaining a cash advance on your credit card or getting a bank loan. You should consider these options because the interest rates and any applicable fees your credit card company or bank may charge are usually lower than the combination of interest and penalties imposed by the Internal Revenue Code.

IRS Penalties and Interest Charges and How They Are Calculated

Generally, April 15 is the deadline for most people to file their individual income tax returns and pay any tax owed. While the IRS is processing your tax return, the IRS checks for mathematical accuracy. When processing is complete, if you owe any tax, you will be assessed a penalty, or interest, and you will receive a bill.

  • Generally, interest accrues on any unpaid tax from the due date of the return until the date of payment is received in full. The interest rate is determined quarterly and is the federal short-term rate plus 3 percent. And note that interest compounds daily.
  • A Failure to Pay Penalty will be imposed if you file your tax return but do not pay all tax owed on time. The Failure to Pay Penalty is one-half of one percent for each month, or part of a month, up to a maximum of 25% of the amount of tax that remains unpaid from the due date of the return until the tax is paid in full. The one-half of one percent rate increases to one percent if the tax remains unpaid 10 days after the IRS issues a Notice of Intent to Levy property. If you file your tax return by its due date and request an installment agreement, the one-half of one percent rate decreases to one-quarter of one percent for any month in which an installment agreement is in effect. Be aware that the IRS applies payments to the tax first, then any penalty, then to interest. Any penalty amount that appears on your bill is generally the total amount of the penalty up to the date of the notice, not the penalty amount charged each month.
  • If you owe taxes and don’t file your tax return on time, there’s also a penalty for not filing on time. The Failure to File Penalty is usually five percent of the tax owed for each month, or part of a month that your return is late, up to a maximum of 25%. If your return is over 60 days late, there’s also a minimum Penalty for Late Filing; it’s the lesser of $205 or 100 percent of the tax owed.  Therefore, if you know you will not be able to file your tax return on time, consult a tax preparer, or Certified Public Accountant (CPA) and request them to file for an extension to file your tax return.  It’s a very simple form and will save you money in the long run. The Law Office of Robert Thomas can also assist you with this form.

Abatement of Penalties by the IRS

The IRS may abate your penalties for filing and paying late if you can show reasonable cause and that the failure wasn’t due to willful neglect. Making a good faith payment as soon as you can may help to establish that your initial failure to pay timely was due to reasonable cause and not willful neglect. If you’re billed for penalty charges and you have reasonable cause for abatement of the penalty, you may request for abatement.  The Law Office of Robert Thomas will assist you will preparing the appropriate Letter of Explanation, and sending it, along with the Letter you received from the IRS, to your service center. The IRS doesn’t generally abate interest charges and they continue to accrue until all assessed tax, penalties, and interest are fully paid.

There are some exceptions to the general deadlines for filing a return and paying tax, such as:

  • If you’re a member of the Armed Forces and are serving in a combat zone or contingency operation. Refer to Publication 3, Armed Forces’ Tax Guide, for details,
  • If you’re a Citizen or Resident Alien Working Abroad. Refer to Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, for details, or
  • If you were a victim in certain disaster situations.

Request Additional Time to Pay the Tax Liability

If you need more time to pay, you may request that the IRS delay the collection of your tax liability and report your account as currently not collectible. If the IRS concludes that you cannot pay any of your tax liability due to a financial hardship, the IRS may temporarily delay collection by reporting your account as currently not collectible until your financial condition improves. However, being currently not collectible doesn’t mean the debt goes away. It means the IRS has determined you cannot afford to pay the debt at this time.

  • Before the IRS will approve your request to delayed collection, you will be required to complete a Collection Information Statement (Form 433-F (PDF), Form 433-A (PDF), or Form 433-B (PDF)) and provide proof of your financial status (this will include detailed information about your assets and your monthly income and expenses). The specific form to be completed is based on your specific situation.  The Law Office of Robert Thomas can assist you with this determination.  We also assist with the completion of the appropriate form(s) and review all required financial statements to assure complete and accurate compliance with the IRS.
  • If the IRS agrees to delay collecting from you, please note, your debt continues to accrue penalties and interest until the debt is paid in full. However, the IRS may temporarily suspend certain collection actions, such as issuing a Tax levy until your financial condition improves. The IRS may still file a Notice of Federal Tax Lien against you while your account is suspended. Please feel free to contact the Law Office of Robert Thomas for more information.

Deferment options for the Armed Forces

  • If you’re a member of the Armed Forces, you may be able to defer payment. See Publication 3, Armed Forces’ Tax Guide. Please call Robert Thomas for further assistance.

Related Articles:

Ways the IRS may Pursue Collections Against You
Appealing the IRS’s Decision
IRS Payment Options
Low Income Earner Federal Guidelines
Illinois State Tax Appeals