There is a lot 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 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 $5,000 balance they have accumulated.
To help soothe fears, I wanted to trace the lifecycle of a balance due to the IRS in order to better educate you 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 15, 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 weeks for the IRS to process a current tax return and eight 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, and those that are handwritten, 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 and 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 Notices 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 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, 12 weeks after their return has been processed, or 16 weeks from when the return is filed.
IRS Collections Step Three: You Receive a Notice of Intent to Levy (CP 504)
After this 16-week time period, the taxpayer’s account has entered into IRS collections status. As such, they will receive a threatening letter notifying them of the government’s intent to seize their property if they do not pay their outstanding balance in full or they do not enter into a suitable payment arrangement. This letter will be sent by certified mail to the last known address of the taxpayer.
However, in some instances where the taxpayer has a large balance due to the IRS, the IRS may skip the prior Notices of Balance due and jump straight to the Notice of Intent to Levy. This is done to compel action on the part of the taxpayer to resolve the account.
This Notice of Intent to Levy is an important step because it satisfies the initial requirement of the government to notify the taxpayer before it begins to seize their assets. I want to point out that there is no actual requirement that the taxpayer receive the notice in order for it to be valid. Under statute, so long as the government mails the notice to the taxpayer’s last known address (usually the address on the taxpayer’s last return filed), then it is satisfied its legal obligation.
However, until this occurs, the IRS is barred from using lien or levy action against a taxpayer to collect any unpaid amounts. Now usually, the IRS will not take any collection action against the taxpayer prior to issuing this notice and usually the taxpayer’s collection matter is transferred over to Automated Collection Systems (see step 5) prior to this happening.
That said, I have run across instances where an administrative defect or other circumstances can cause a levy to be issued erroneously. If you believe that a levy has been issued erroneously, it is a good idea to have a tax attorney do a compliance check to make sure proper protocol was followed. This is also the time that you need to start taking action to resolve your liability, as things will start to go from bad to worse.
IRS Collections Step Four: You Receive Notice of a Federal Tax Lien Being Filed
Steps four, five, and six are generally interchangeable. After a Notice of Intent to Levy has gone out, your account will likely be sent to Automated Collection Systems. However, adverse collection action can also be taken from the service center where the return was processed as well. Sometimes, but not always, you will receive a Notice of Federal Tax Lien in the mail after the first Notice of Intent to Levy has been issued.
As stated, a lien filing against you is not necessarily automatic and does not necessarily occur at this stage in the process. The IRS frequently files federal tax liens against the taxpayer in order to secure their interests in any property that the taxpayer may be holding.
A lien is a security interest granted over a person’s property in order to ensure the payment of their tax liability. Typically, when a taxpayer goes to sell that property, such as with a house, the payment of a lien takes priority over any funds that would be distributed to the seller. Liens also can damage your credit score, impede your ability to borrow funds, and are a matter of public record, meaning that anyone can see if a lien has been filed against you.
It is critical to note that a lien attaches to all property that the taxpayer has, both real and personal, including property that is acquired after the lien is filed. Under Internal Revenue Code (IRC) §6322, the lien is effective from the date that the tax is assessed. Thus, if the tax is assessed on April 15 when the return is filed and the lien is filed on November 15, the lien’s priority date begins on April 15..
Liens will remain on the property until the tax has been paid in full, abated by the IRS (such as through an Offer in Compromise), or when the collection statute of limitations has expired (typically 10 years from the date of the assessment).
IRS Collections Step Five: Your Case is Assigned to the IRS Automated Collection Systems (ACS)
At a certain point (usually after 16 weeks), the service center makes the determination that its collection efforts have not yielded sufficient results and the taxpayer’s account is transferred to one of two places: Automated Collection Systems (ACS) or to the Collection field function (i.e. a revenue officer at a local IRS office). Most collection accounts will start in ACS though. ACS is a system of 23 computerized telephonic collection centers spread across the United States. ACS essentially has three functions.
- IRS Collections Contact Function – The primary function of ACS is to receive incoming calls and make outgoing calls in order to encourage contact with non-filing taxpayers or those who are delinquent on their account and have a balance due. ACS centers around the country handle a high volume of calls daily and work to resolve the accounts of taxpayers as well as to collect information that would be valuable to the collection effort that is voluntarily disclosed during these communications (location of assets, contact information, etc.)
- IRS Collections Investigatory Function – This part of ACS searches taxpayers through public records, asset searches, and calls to third parties in order to pinpoint the taxpayer’s location and the location of any assets that may be seized by the IRS during the collections process.
- IRS Collections Research Function – While it is not the most appropriate name for this function, it is the section of ACS that handles any incoming correspondence received from taxpayers and makes the appropriate adjustments to the taxpayers’ accounts.
There are several important things to note regarding ACS. First, even though the department functions like a call center, your case is usually assigned to an individual collection agent for review, to issue any notices that need to be sent, and to handle any adverse collection activity that needs to be taken. Most ACS employees will generally handle a volume of about 125 cases at a time.
However, you will likely never speak to the individual collection agent assigned to your case. When you call into ACS, your call is handled by one of several employees (even those in different centers), in the particular section where your case has been transferred.
For example, if you owe a large balance, a more senior representative is likely handling your case and a junior representative who answers the phone will likely transfer you to that section where those representatives are stationed. Likewise, special sections exist within ACS to handle certain categories of taxpayers (such as federal employees), who are handled entirely by their own separate section.
If you do not contact ACS directly, rest assured that they will make the effort to get in touch with you. ACS has several different avenues for getting a hold of taxpayers. Most people do not realize that their tax return has a treasure trove of information that can be used to find and locate you. Your current employment/employment history (via your W2s), your bank accounts and other asset accounts (via 1099 interest statements filed by the banks), your address, and your social security number are all readily available.
In addition, ACS frequently uses public information to track down your current location and whereabouts. Things such as your credit history (credit report), any real property owned, or DMV records can all be easily accessed. In addition, the IRS can and does communicate with the state revenue agencies to verify the information that they have on file (and vice versa).
A database is kept of all of this information, which may be used against you later for collection purposes. In addition, the IRS keeps track of any routing or account numbers that it receives when payments are made by the taxpayer via check or the Electronic Federal Tax Payment System (EFTPS). Finally, ACS agents can and do use the internet to locate information about you. You should consider any information on the internet fair game for use by the IRS.
The best time to call ACS is either early in the morning or late at night. As with most telephone response systems, ACS hits high call volume during mid-day. ACS’s hours also stagger based on the area of the country you are calling from. Call from an East Coast area code to California and you will be able to reach them earlier than their 8 a.m. start time (because everyone likes to talk to the IRS first thing in the morning). Likewise, calling them from a West Coast area code to the East Coast means that you can meet them late at night.
IRS Collections Step Six: Your Case is Assigned to a Revenue Officer
When contact by phone fails, the efforts of ACS are not fruitful and if your case meets a certain collection priority (usually based on the amount due or estimated due by the IRS), then you will be referred by ACS to the field where a local IRS office will assign you to a revenue officer. Revenue officer assignments are based geographically on the IRS office that is closest to the taxpayer. These offices contain collection personnel who handle collection efforts at the local level.
Revenue officers are highly skilled collection agents within the IRS who resolve accounts the IRS feels are a collection priority. Most revenue officers have some sort of financial background or previous collections experience. In contrast to ACS, they have fewer cases assigned to them and can provide more individualized attention to the accounts they are charged with collecting on.
Because they are based locally, revenue officers have more collection techniques at their disposal. They can contact you at your home or place of business, access DMV records or investigate other local sources, and even contact third parties in an attempt to get a hold of you through family members and neighbors.
If you own a business that owes money to the government, revenue officers often conduct “site visits” where they will make surprise visits in order to size up what assets the business has and to get more information out of owners and employees.
In addition, revenue officers have the power to issue summons to the taxpayer and third parties, such as banks or other financial institutions. They can demand that the taxpayer show up to their office at a designated time with records in hand. Refusing to respond to a revenue officer summons is a very serious matter. If the revenue officer choses, they can get IRS district counsel involved who will get a court order to force you to comply with the summons.
If your account has gotten to the point where a revenue officer is involved, then you are at the highest level within the IRS for collections until district counsel gets involved and initiates legal action against you and/or your property. Some revenue officers are very senior and only become involved in extremely large balance due cases or those that have an immediate priority (e.g., you might be thought to be fleeing the country or moving assets). Revenue officers come in all shapes and sizes though. Many are quite pleasant to work with and others can be extremely … challenging. Be very careful in dealing with them.
If you are dealing with a revenue officer, it is a good idea to have an experienced advocate in your corner. My firm, Brotman Law, specializes in helping small business owners deal with the IRS and the State of California. If the revenue officer is breathing down your neck and disrupting your business or personal life, give us a call. We would be happy to schedule a consultation with you and work out a strategy to pay off your IRS debt.