The IRS collection process is a series of steps the IRS takes to recover unpaid taxes from individuals or businesses that have not fulfilled their tax obligations. This process can involve issuing notices, filing liens, or seizing assets if the taxpayer fails to pay the owed taxes.
The process typically follows these stages:
- Notice of Tax Due: The IRS begins by sending a CP14 notice, which informs the taxpayer of their outstanding tax debt, including any penalties and interest. This is the first communication in the collection process.
- Demand for Payment: If the taxpayer does not respond to the initial notice, the IRS will issue further notices, such as a CP501 or CP504, demanding payment and warning of impending collection actions.
- Final Notice of Intent to Levy: If the debt remains unpaid, the IRS will send a Final Notice of Intent to Levy (Letter 1058). This notice gives the taxpayer 30 days to take action before the IRS proceeds with collection actions, such as levies or garnishments.
- Federal Tax Lien: If no action is taken, the IRS may file a Notice of Federal Tax Lien, which gives the IRS a legal claim to the taxpayer’s property, including real estate, financial accounts, and personal assets. A lien can damage the taxpayer’s credit score and restrict their ability to sell or refinance property.
- Levy: A levy is the IRS’s most aggressive collection tool, allowing it to seize assets directly. This can include:
- Wage garnishment, where a portion of the taxpayer’s paycheck is withheld by their employer and sent to the IRS.
- Bank levies, where the IRS can freeze and take funds from the taxpayer’s bank accounts.
- Seizure of property, such as vehicles, homes, or other assets, to satisfy the unpaid tax debt.
- Wage Garnishment: If a levy is issued, the IRS may garnish the taxpayer’s wages by instructing their employer to withhold a portion of their paycheck and send it directly to the IRS. Wage garnishment continues until the full debt is paid or the taxpayer makes alternative arrangements with the IRS.
- Seizure of Property: In extreme cases, the IRS can seize and sell assets, such as vehicles or real estate, to recover the unpaid taxes.
Taxpayers who receive notices from the IRS should act promptly to avoid escalating collection actions. Several resolution options are available, including:
- Installment Agreements: Allows taxpayers to pay off their tax debt over time through monthly payments.
- Offer in Compromise (OIC): Enables taxpayers to settle their tax debt for less than the full amount owed if they can demonstrate an inability to pay.
- Currently Not Collectible (CNC) Status: Temporarily suspends collection actions for taxpayers experiencing financial hardship.
Understanding the stages of the IRS collection process is crucial for taxpayers to address their tax debt before it results in severe consequences like property seizure or wage garnishment. Taking proactive steps to resolve the debt, such as contacting the IRS and setting up a payment plan, can help taxpayers avoid the more aggressive stages of the collection process.