IRS Collection Notices: An In-Depth Guide

During the 2019 pandemic, the IRS slowed down a bit for obvious reasons. Processing refunds took longer, a number of audits went down, and many didn’t receive collection notices for their unpaid taxes.

But now, The IRS is clearing up all the backlogs at a breakneck speed. According to an IRS press release, the agency brought down the number of unprocessed paper-filed tax returns from 13.3 million to 2.6 million in one single year (2022-2023). That means your chances of getting IRS collection notices have also gone up (provided you have any unpaid taxes).

And we all know how terrifying that prospect sounds. However, a lot of fear surrounding collection notices is misplaced. If you have proper knowledge, you can get out unscathed while still being in the IRS’s good book.

This article is here to provide you with that much-needed knowledge. Read it to get a proper understanding of the entire subject.

Let’s start off by touching on the collection process itself.

IRS Collection Process

The IRS never forgets what you owe it. And it will initiate its collection process by sending a CP 14 notice to you, the taxpayer. Two publications – Publication 1 (Your Rights as a Taxpayer) and Publication 594 (Understanding Collection Process) also accompany that CP 14. These are for educating you about your rights as well as the entire collection process.

Once received, you are expected to pay the full amount within the deadline. However, in case of financial hardship, the IRS can arrange alternative payment options (more on that later).

On the other hand, if you don’t agree with the notice, you can certainly reach out to the IRS and explain your case.

Now, things can get messy if you neither pay or respond in time. In that case, the IRS sends multiple notices (for example, Notice CP501, CP 503 and CP 504). At the very end, the IRS files a federal tax lien, which is a legal claim against tax payer’s personal properties. Once a lien arises, the IRS generally can't release the lien until the tax, penalty, interest, and recording fees are paid in full or until the IRS may no longer legally collect the tax.

Alternately, you might be served with a Notice to Intent Levy. This has a very serious and immediate consequence – the IRS is trying to seize the funds out of bank accounts.

You have the right to request a Collection Due Process (CDP) hearing if you disagree with the IRS's collection actions. The CDP hearing is an opportunity for the taxpayer to present their case to an independent appeals officer.

Note: The Collection Statute Expiration Date (CSED) is the date by which the IRS must collect the tax or take legal action to collect it, which is generally ten years from the date the tax was assessed. The statute of limitations is the time limit for the IRS to take legal action to collect the tax, which is also generally ten years from the date the tax was assessed.

IRS Payment Plan

If you don’t pay your taxes by the due date, you could get hit with some nasty penalties — plus interest that compounds daily. The failure to pay penalty is 0.5% of the unpaid tax balance for each month it remains unpaid, up to a maximum of 25%. Additional penalties apply if you also failed to file your tax return.

The IRS is generally willing to work with you — and even reduce penalties — so long as you reach out to the agency in a timely manner with a reasonable explanation (and the issue wasn’t due to “willful neglect” or fraud).

If you’re unable to make any payments toward your balance due to financial hardship, you may be able to temporarily delay collections by being deemed “not collectible” by the IRS. “Being currently not collectible does not mean the debt goes away,” the IRS website explains. “It means the IRS has determined you cannot afford to pay the debt at this time.”

To make your case, you’ll need to contact the IRS at 800-829-1040 or by calling the number on your bill or collection letter(s).

Additionally, the IRS offers several other payment plans.

• Short-term payment plan: A free 180-day repayment plan available if you owe the IRS less than $100,000 in combined tax, penalties and interest. Online application available.
• Long-term payment plan: A monthly payment plan that costs between $31 and $130 to set up depending on your payment method. You can apply online if you owe $50,000 or less in combined tax, penalties and interest. If your tax bill is more than that, you will need to apply manually using form 9465. Also called an installment agreement.
• Offer in compromise: An application to settle your tax debt for less than you owe, mainly because of financial hardship. The process is lengthy, and application fees typically start at $205 plus an initial payment of your tax bill.

If your payment plan or settlement request is rejected, or if you disagree with other debt collections activity, you can also fight the collections process with an appeal, which will typically stop the IRS from collecting the debt until the appeal is settled.

IRS Collection Notices

So far, we discussed the entire process of IRS collection. As mentioned before, this process involves you receiving multiple notices depending on your situation and action. Here is a brief discussion of the most common IRS collection notices.

CP14 Notice

• The CP14 notice is the first and most common notice sent to taxpayers, informing them of a tax due, including the amount of tax, interest, and penalties.

• The notice requests payment within 21 days.

• If you have already paid the tax in full and on time, electronically or by mail, no immediate action or phone call is needed.

CP501 Notice

• The CP501 notice explains the amount you owe, the due date for payment, and your payment options.

• Pay the amount you owe by the due date shown on the notice.

CP503 Notice

• The CP503 notice is a follow-up to the CP501 notice, reminding you that you still have an unpaid balance.

• This notice includes the total amount due, including any additional interest and penalties.

• Pay the amount you owe by the due date shown on the notice to avoid further collection actions.

CP504 Notice

• The CP504 notice is the final notice before the IRS takes further collection actions.

• This notice warns you that the IRS intends to levy your state tax refund or other property to satisfy the debt.

• Pay the amount you owe immediately to avoid the levy.

CP521 Notice

• The CP521 notice is sent to taxpayers who have an unpaid balance after receiving a CP504 notice.

• This notice provides information on how to request a collection due process hearing.

• If you do not request a hearing within 30 days, the IRS may proceed with the levy.

CP523 Notice

• The CP523 notice is sent to taxpayers who have requested an installment agreement after receiving a CP504 notice.

• This notice confirms the acceptance of your installment agreement request and provides details on the terms and conditions.

• Make your scheduled payments to avoid further collection actions.

CP90 Notice

• The CP90 notice is a final notice before the IRS takes further collection actions, such as levying certain assets, to satisfy your unpaid taxes.

• You have the right to a Collection Due Process hearing, where you can present your case and potentially resolve the issue.

• If you do not request a hearing within 30 days, the IRS may proceed with the levy.

Letter 1058

• Letter 1058, also known as the LT11 notice, is a Final Notice of Levy & Seizure.

• This notice is sent when the IRS intends to levy your assets to satisfy the outstanding tax debt.

• Pay the amount you owe immediately or contact the IRS to discuss your options and avoid the levy.

Letter 3172

Letter 3172 is a formal notice of a tax lien against your physical and financial assets. It provides the IRS with the right to seize the proceeds from the sale of any assets that you currently own or acquire after the lien’s issuance. Additionally, it protects the IRS’s right to collect on your tax debt by all legal means. Federal tax liens cannot be discharged in bankruptcy.

How To Respond to IRS Collection Notices

When you receive a collection notice from the IRS, it's important to respond promptly and appropriately. Here are some steps to follow when addressing IRS collection notices:

Read the Notice Carefully: Understand the reason for the notice, whether it's about additional tax owed, a larger refund, or a request for payment or additional information.

Don't Ignore the Notice: Most IRS letters and notices are about federal tax returns or tax accounts, so it's crucial not to ignore them.

Don't Panic: Many of these letters can be dealt with simply, without having to call or visit an IRS office.

Reply if Instructed: Some notices may require a response, while others may not. Follow the instructions on your specific notice regarding how to reply, which could include mail, fax, or digital submission through the IRS' Documentation Upload Tool.

Dispute the Notice if Necessary: If you disagree with the IRS, mail a letter explaining why you dispute the notice, including any supporting documents and information you wish the IRS to consider.

Keep a Copy of the Notice and Your Response: It's important to maintain a record of all correspondence with the IRS for your reference and future needs.

Seek Professional Assistance if Needed: If you're unsure how to respond to the notice or need help navigating the collection process, consider consulting a tax professional or contacting the IRS for further guidance.

Consider Payment Options: If you agree with the notice and need to make a payment, the IRS offers various payment options, including online payment, installment agreements, and offers in compromise.

Recap

IRS collection notices might feel unnerving. But if you respond in a timely manner and have a legitimate reason for not paying, the IRS is always willing to assist.  Keep in mind, things can only go downhill if you stay silent and don’t take any action.

Frequently Asked Questions

What is an IRS collection notice?

Simply put an IRS collection is a written communication sent by the IRS to the taxpayers who owe unpaid taxes. These notices can be sent for various purposes, from reminding the taxpayer about unpaid taxes to providing information on resolving the issue.

Why did I receive an IRS collection notice?

Because the IRS thinks you owe unpaid taxes or have some other tax-related issues.

What are the different types of IRS collection notices?

There are multiple collection notices. Each of them has a unique purpose and you need to handle them differently. Some common IRS notices are  the CP14, CP501, CP503, CP504, and Letter 1058.

How should I respond to an IRS collection notice?

First, you go through the notice and cross check all the information (tax fraud is a serious offense, and you don’t want to take chances). Then take time to understand the issue and read the instructions.

If you agree with the unpaid tax amount mentioned, pay it before the deadline. If you don't have enough resources to pay the whole amount, set up a payment plan (or go for OIC). However, if you don’t agree, contact the IRS.

What you don’t want to do is not respond to the IRS notices. It can have serious consequences.

What happens if I ignore an IRS collection notice?

Ignoring an IRS collection notice can lead to serious consequences, including additional penalties and interest, wage garnishment, bank account levies, and even legal action.

Can I dispute the information in an IRS collection notice?

Yes, you can. Feel free to contact the IRS and explain your case  if you believe there is an error. Don’t forget to backup your arguments with proper proofs and documents.

Are there options for reducing the amount I owe to the IRS?

Yes, if you really don’t have any means to pay off your tax debts, Offer in Compromise (OIC) can be your last option. Simply put, you enter a negotiation with the IRS so that you can settle at an amount less than your tax debt. However, this is a relatively complex process and meeting criteria is pretty strict.

How long does the IRS typically give for responding to a collection notice?

The time frame for responding to an IRS collection notice varies depending on the type of notice. Some notices require a response within 30 days, while others may allow more time.