The arrival of a collection notice or letter from the IRS makes your heart skip a beat. When the IRS sends a notice you know they mean business. When you fail to respond to an IRS notice within the allotted time, things only get worse.
Keep in mind as much of a downer it is to receive a collection notice from the IRS you can address it and get back to life. The first step is understanding how to interpret and respond to collection notice letters. While every tax situation is unique, collection processes generally unfold the same way every time.
In this guide youโll learn about:
- How the Collections Notice Process Works
- Common Collections Notices
- How to Respond to IRS Collection Notices
- How to Get Help for an IRS Collection Notice
How the Collections Notice Process Works
Every year the IRS sends millions of collection letters and notices to taxpayers for a variety of reasons. Many collection notices and letters are about straightforward issues that can be easily remedied.
There are two types of IRS collection notices and letters: The letters you agree with and the letters you disagree with.
If you intend to honor a notice that requests payment, simply follow its instructions to settle your
account. If you receive an โaccount changeโ notice that does not request immediate payment, you will not need to respond. Most of the time the letters provide very straightforward directions.
Itโs important to reply by the due date
When you fail to respond by the due date, the IRS will become more aggressive in its attempts to collect. If you canโt pay in full, you do have options that will cease the IRSโs collection efforts. Some examples include:
- Getting a cash advance or credit line to finance your payment
- Setting up a monthly installment agreement with the IRS
- Negotiating an Offer in Compromise (OIC) if you qualify
- Claiming a financial hardship that prevents you from making any payments
Whatever route you choose, make sure to respond to the notices the IRS sends. Ignoring notices only makes the problem worse as the IRS will add on interests and penalties. Working with a tax professional can be the best way to get the IRS to stop their collection efforts and figure out a plan that will work for your unique situation.
Common IRS Collection Notices
CP 71C: Reminder of Overdue Taxes
A CP 71C notice typically covers balances that have remained unpaid for several years and
Specifies:
- The original amount owed
- The tax year in which it was owed
- The interest amount that the balance has accrued
- The date by which the recipient is required to remit payment
CP 501/502: Notice of Balance Due
A CP 501 letter serves as your first notice of an overdue tax balance. It is usually sent before the IRS initiates liens, levies, garnishments or other tax collection attempts.
If you fail to acknowledge your receipt of a CP 501 notice, you will receive a CP 502 notice that
informs you of additional interest charges and penalties on your account and encourages you to
make an immediate payment-in-full. This notice may come with additional documents like:
- Privacy Act Notice 609
- Line-item accounting of your interest liability
CP 503: Second Notice of Balance Due
This is often the last balance-due notice that you receive before the IRS initiates more
aggressive collections measures. It typically provides a 10-day time frame for full payment
of your past-due account balance.
CP 504: Final Notice of Balance Due
A CP 504 notice typically precedes a formal Notice of Intent to Levy. It will recap your
back-tax liability with additional interest charges and announce the IRSโs intention to garnish
your state tax refund. If you live in a state without a personal income tax, your CP 504
notice may contain a warning that the IRS will place levies or liens against additional assets
or wages.
CP 521: Installment Agreement Payment Due
This notice comes after the deadline for a back-tax installment payment has passed. It lists the past-due balance with interest charges and demands payment by a specific date. Once you receive this notice, your past-due balances will continue to accrue interest. You may also be subject to other penalties, including the outright cancellation of your installment agreement.
CP 523: Installment Agreement Default: Notice of Intent to Levy
If you are unable or unwilling to make your installment payments on time, you will receive
a CP 523 notice that demands immediate repayment of your balance. Failure to
acknowledge this notice will result in the cancellation of your installment agreement and
the enactment of liens, bank account levies, and wage garnishments. Even if you are able
to avoid cancellation, you may be required to pay a fee before continuing with your
Payments.
CP 90/CP-297: Final Notice of Levy and Notice of Your Right to a Hearing
This serves as your final notice of the IRSโs intent to place a levy on your assets, wages or accounts. To prevent a levy, you will need to pay your balance in full within 30 days. If you are unable or unwilling to do so, the notice also provides information about filing a Form 12153 to request a Collection Due Process Hearing.
Letter 1058 (LT 11): Final Notice/Collection Due Process Notice
Like CP 90, this letter serves as a last warning of an impending levy. Failure to pay its stated balance in full will result in a levy. Additionally, the letter reserves the IRSโs right to search for other assets or income streams to levy.
Letter 3172: Notice of Federal Tax Lien Filing & Your Rights to a Hearing under IRC 6320
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 lienโs issuance. Additionally, it protects the IRSโs 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
The IRS can and does make errors in calculating your back-tax balance. They can also overstep their authority in placing a lien or levy on your assets. To make matters worse it can take years for the agency to make the necessary corrections. During this time your credit rating suffers along with mental health and personal relationships.
The most important thing to keep in mind when receiving an IRS collection notice is this:
Donโt Panic
You never have to face the IRS on your own, and often doing so can make matters worse. The IRS agents are trained to elicit incriminating statements and often attempting to interact with an IRS agent can result in harsher penalties.
Do not ignore IRS collection notices, but do get help from a tax professional. Even if youโre unable to pay your tax debt in full you have more options than you might realize. The IRS doesnโt explain your options in an easy-to-understand way, and they are notoriously bad at communication. Working with a tax professional ensures you get the best possible outcome for your case, and with as little headache as possible.
How We Can Help with Your IRS Collection Notice
If youโve received an IRS collection notice the Tax Hardship Center is ready to help. We provide the advice and guidance you need to get through any type of IRS collection effort.
Our team of tax specialists has a proven track record of helping people with all types of simple and complex tax problems.
The Tax Hardship Center Can Help You:
- Remove tax liens
- Remove tax levies
- Prevent the seizure of assets
- Stop wage garnishments
- Set up installment plans
- Negotiate offers in compromise
- File overdue tax returns
- Defend tax audits
