IRS Collections: How Collection Process Works & How to Stop
If you file your income tax return without paying your taxes in full, you will receive a bill (CP-14) from the Internal Revenue Service. This bill begins the IRS collection process, a process which will become increasingly aggressive until you have paid the owed tax in full or until the IRS is no longer legally able to collect the tax.
After the initial letter indicating the amount of taxes you owe and the amount of penalties and interest, you’ll receive a series of four more letters before the IRS takes more aggressive action. You’re expected to pay your entire balance upon receipt of this first letter, which you can do using a check, money order or credit card by phone. If you’re unable to send the full amount due, send as much as you can. The remaining balance owed will continue to incur interest daily and a late fee penalty each month it remains unpaid. Most people find paying their taxes with a credit card or even a cash advance on a credit card is less expensive than the fees and penalties charged by the IRS, so do what you can to pay your taxes.
If you don’t pay when you receive the first collection letter from IRS, you can expect the rest of the “CP” letters to begin within a month. Each of the letters becomes increasingly more demanding. If you reach the third CP letter (CP-503) without paying your taxes, this letter will give you 10 days to pay your tax balance or the IRS will take further collection action against you, and possibly file a federal tax lien. If you still do not pay, the fourth CP letter (CP-504 or CP 90 with Social Security Garnishment) is sent which will indicate the IRS intent to levy your tax refund and look for assets to levy if you do not respond. Normally, L-1058/L-11 will follow CP-504, which your last opportunity to respond and make arrangements for payment before the IRS takes collection action. Below are a few of the collection actions that the IRS may take against you.
- IRS Collection Method: Notice of Federal Tax Lien: A federal tax lien allows the IRS to place a claim against your property, including property you obtain after the lien is initiated. The notice can adversely affect your credit rating, and normally cannot be removed until the taxes, interest, penalties and recording fees are paid in full.
- IRS Collection Method: Notice of Levy: A Notice of Levy allows the IRS to take and sell your property in order to pay your taxes. Property might include your real estate, car, boat, etc. Assets can be levied, too: retirement accounts, bank accounts, current salaries and/or Social Security benefits.
- IRS Collection Method: Offsetting Refunds: All future federal tax refunds owed to you will be taken by the IRS to offset the taxes you owe. Your state tax refunds may also be applied to your federal tax liability.
How to Stop the IRS Collection Process
The best way to stop the IRS collection process is to take action when you begin receiving letters stating the amount you owe. They will not go away if you ignore them. Do not wait until the IRS places a federal tax lien or levy against your assets! Below are the different ways to stop the collection process based upon your financial situation.
- Can pay in full: If you can pay in full then you can simply stop the collection process by sending in the full amount owed plus interest and penalties. If you know you can pay in full but don’t want to because of an unsure future financial situation then it could be a good idea to enter into a payment plan to stop collection actions and as a way to not pay all the taxes you owe at once.
- Can’t Pay in full but can afford monthly payments: If you can’t pay the amount in full but can afford to make monthly payments towards the amount of taxes owed you can apply for a monthly installment agreement online or by mailing in the Installment Agreement Request, Form 9465 with your bill. Once your installment agreement is accepted the collection actions will be halted.
- Can’t afford to pay anything: If you can’t afford to pay anything because of financial hardship you have two options. The first is to be declared currently not collectible. This will temporarily suspend collection actions for a period of time in order to allow your financial situation to improve. If your financial situation is poor and it isn’t likely that your financial situation will improve enough to ever pay off the taxes owed then an Offer In Compromise is viable, espsecially if you don’t qualify for an IRS Installment Agreement. With an offer in compromise the IRS will allow you to settle your taxes for less than the total amount owed and consider you back into good standing with them.
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 or they can and will take action to secure payment through other means.
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