There is alot of confusion among many of my clients about the IRS collections process and what actions the IRS is able to legally take against the taxpayer. People who owe balance dues see a series of increasingly threatening letters and I often get panicked phone calls from taxpayers who think that the IRS is going to take their house because of the five thousand dollar balance they have accumulated. As such, I wanted to trace the lifecycle of a balance due to the IRS in order to better educate people on exactly how the IRS collections process works. I hope this serves as a helpful resource and alleviates some of the stress associated with owing money to the government.
IRS Collections Step One – Your Tax Return is Filed
It is April 15th and this year’s tax return has been filed. The very first thing that happens is that the tax return is sent to a service center in the area of the country where you live for processing. The service center is charged with receiving the return, running a basic check for accuracy, and processing the return into the IRS computer system. All returns, whether E-filed or handwritten, are eventually entered into the IRS computer system so that the IRS can quickly and easily assess the information in the future. Generally, it takes approximately four (4) weeks for the IRS to process a current tax return and eight (8) weeks for the IRS to process a return for an older year. In some cases, however, there are a number of things that may cause a delay in a return being processed. Returns with incomplete information, inaccurate social security numbers, those that are hand written, may cause a delay in how quickly the IRS is able to process the return. In addition, some returns are selected for additional screening by the service center because of information contained on the return or the need to verify that information with filings. Delays also happen during peak IRS seasons (late March/April/late September/October), so you may expect a delay in the processing of your return if it is submitted during one of these times. Eventually though, your IRS becomes a series of data lines (known as a return transcript) and is stored by the IRS in their computer database.
IRS Collections Step Two – You Receive a Notice of Balance Due (IRS Notice CP-501, 502 and 503)
After your return has been processed, if your return indicates a balance due or the IRS makes a change to the return and additional tax is assessed, then you will start to receive notices from the IRS. These Notice of Balance Due come approximately one month after the tax return has been processed. This simple computer generated letter does not threaten collection action, but will simply remind the taxpayer that they have a balance due and that interest and penalties will continue to accrue. The taxpayer will continue to receive increasingly urgent letters and Notices of Balance Due approximately every four (4) weeks until the balance is paid or the IRS begins to take collection action. This means that, generally speaking, a taxpayer will enter IRS collections approximately eight weeks after receiving their first Notice of Balance Due, twelve weeks after their return has been processed, or sixteen weeks from when the return is filed.