Eleanor Finch
The IRS has a range of collection tools at its disposal when taxpayers fail to meet their tax obligations. These collection activities can include issuing notices of levy on salary, income, bank accounts, or property, as well as assessing penalties and interest on unpaid balances. In some cases, the IRS may file a Notice of Federal Tax Lien, which is a legal claim on the taxpayer's property, or they may accept an Offer in Compromise, allowing taxpayers to settle their liabilities for less than the full amount owed. The IRS may also pursue criminal investigations in cases of non-compliance with tax laws. It is important for taxpayers to understand their rights and options when dealing with IRS collection activities, as there are legal protections in place to ensure fairness and impartiality in the collection process.
| Characteristics | Values |
|---|---|
| Collection process initiated | When a person does not pay their tax in full when they file their tax return, they will receive a bill for the amount they owe, which starts the collection process. |
| First notice | The first notice received will be a letter explaining the balance due and demanding payment in full, including the amount of tax, penalties, and interest accrued. |
| Interest and penalties | The unpaid balance is subject to daily compounding interest and a monthly late payment penalty up to the legal maximum. |
| Delay collection | The IRS may temporarily delay collection if the taxpayer cannot pay due to financial hardship, but the debt continues to accrue penalties and interest. |
| Collection suspension | During the COVID-19 pandemic, the IRS suspended new Notices of Federal Tax Lien and levies until July 15, 2020, unless there were pressing circumstances or taxpayer agreement. |
| Notice of Levy | The IRS may issue a Notice of Levy on salary, income, bank accounts, or property to legally seize assets and satisfy the tax debt. |
| Trust fund recovery penalty | A trust fund recovery penalty may be assessed for certain unpaid employment taxes. |
| Summons | The IRS may issue a summons to the taxpayer or third parties to secure information for unfiled tax returns or determine the taxpayer's ability to pay. |
| Federal Payment Levy Program | Certain federal payments may be subject to a levy through the Federal Payment Levy Program to collect delinquent tax debts. |
| Offers in Compromise | Taxpayers may propose an Offer in Compromise to settle tax liabilities for less than the full amount, but they must meet certain requirements, and acceptance is not guaranteed. |
| Payment options | Taxpayers who cannot pay in full may enter into a monthly payment agreement or apply for a payment plan or Installment Agreement. |
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What You'll Learn
Filing a Notice of Federal Tax Lien
A federal tax lien is a legal claim to your property, including property acquired after the lien arises. It arises when a "person" liable for federal tax fails to pay their taxes after a government demand for payment. In this context, a "person" includes individuals, trusts, estates, partnerships, associations, companies, and corporations. The lien is effective from the date of the government's tax assessment.
A Notice of Federal Tax Lien (NFTL) is a publicly filed document that notifies creditors of the IRS's lien interest. It does not create the lien but informs others of its existence. The IRS may file an NFTL in the public record to notify creditors of your tax debt. The date of the NFTL filing is important for determining the IRS's priority against other creditors.
To avoid a federal tax lien, taxpayers should file and pay their taxes in full and on time. If taxpayers cannot pay the full amount, payment options are available to help settle the debt over time.
If a taxpayer has a Notice of Federal Tax Lien on their property, they can file Form 12277 to request its removal. However, just filing the form does not guarantee that the IRS will remove the lien, and the taxpayer may need to enter into a separate agreement for payment.
- A federal tax lien arises when a taxpayer fails to pay their taxes after a government demand, and it is a legal claim on their property.
- A Notice of Federal Tax Lien (NFTL) is a publicly filed document that notifies creditors of the IRS's lien interest.
- The NFTL does not create the lien but informs others of its existence and determines the IRS's priority against other creditors.
- Taxpayers should pay their taxes in full and on time to avoid a federal tax lien.
- If a taxpayer has an NFTL on their property, they can file Form 12277 to request its removal, but they may need to enter into a separate payment agreement.
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Issuing a levy
If an individual or entity fails to comply with the tax code, the IRS's Collection function collects federal taxes that have been reported or assessed but not paid. The IRS may issue a levy on salary and other income, bank accounts, or property. A levy is different from a lien. A lien is a legal claim to your property, including property acquired after the lien arises. A levy, on the other hand, is the actual seizure of your property.
Before issuing a levy, the IRS will send a Final Notice of Intent to Levy and Notice of Your Right to a Hearing (levy notice) at least 30 days before the levy. The IRS may give you this notice in person, leave it at your home or your usual place of business, or send it to your last known address by certified or registered mail. If you do not pay your taxes (or make arrangements to settle your debt), and the IRS determines that a levy is the next appropriate action, the IRS may levy any property or right to property you own or have an interest in. For example, the IRS could levy property that is yours, but is held by someone else, such as your wages, retirement accounts, dividends, bank accounts, licenses, rental income, accounts receivables, the cash loan value of your life insurance, or commissions. Wage levies are continuous, and a portion of your wages is exempt from levy. If the IRS levies your bank, funds in the account are held and after 21 days sent to the IRS.
If the IRS has issued a levy, you may be able to get it released. The IRS is required to release a levy if it determines that:
- You paid the amount you owe
- The period for collection ended prior to the levy being issued
- Releasing the levy will help you pay your taxes
- You enter into an Installment Agreement and the terms of the agreement don’t allow for the levy to continue
- The levy creates an economic hardship, meaning the IRS has determined the levy prevents you from meeting basic, reasonable living expenses
If the IRS denies your request to release the levy, you may appeal this decision. You may appeal before or after the IRS places a levy on your wages, bank account, or other property. After the levy proceeds have been sent to the IRS, you may file a claim to have them returned to you. You may also appeal the denial by the IRS of your request to have levied property returned to you. For a full explanation of your appeal rights, see Publication 1660, Collection Appeal Rights.
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Summons to secure information
A summons is a legally binding order for someone to do a specified thing, issued by a court or other legal authority. In the context of the IRS, a summons is a tool for obtaining taxpayer records and information. The IRS has the authority to issue a summons without court approval, and it can be served on the taxpayer or a third party.
If the IRS is unable to obtain the information it requires by issuing an IDR (Information Document Request) or making a third-party contact, it may decide to issue a summons. This is often a last resort, used when other avenues have failed. The summons must be served by hand delivery or by leaving a copy at the last known abode. For third-party record keepers, it can be delivered by certified or registered mail.
Once served, the recipient must either comply with the summons, choose not to comply, or bring a proceeding to quash it. If the recipient fails to comply, the IRS may seek to have a court enforce the summons. The court is not obliged to enforce it, and if it does not, the IRS can issue another summons. If the recipient brings a suit to quash the summons, the filing will suspend the statute of limitations for the assessment of tax and criminal liability. If the recipient fails to act after a court has ordered enforcement, sanctions can be imposed.
The IRS's summons power is broad, and it can even reach records located in foreign countries. However, there are some exceptions to this power. The IRS cannot, for example, compel the production of information protected by attorney-client privilege.
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Trust fund recovery penalty
The Internal Revenue Service (IRS) may take collection actions if taxes are not paid on time and the IRS is not notified of the reason for non-payment. These actions can include issuing a notice of levy on salary and other income, bank accounts or property, assessing a trust fund recovery penalty, or issuing a summons to secure information to prepare unfiled tax returns.
The Trust Fund Recovery Penalty (TFRP) is a fine charged to employers who knowingly or willfully withhold employee FICA and income taxes owed to the IRS. Employers are required to withhold taxes from employee paychecks and submit them to a trust, from which periodic payments are made to the IRS, typically on a quarterly basis. If an employer misuses this income instead of holding it in trust, the IRS will issue a TFRP equal to the amount of taxes withheld. For example, if an employer misused $10,000 in withheld taxes, they would be required to pay back the $10,000 plus an additional $10,000 penalty.
The TFRP may be applied if unpaid trust fund taxes cannot be immediately collected from the business, and the business does not have to have stopped operating for the penalty to be assessed. A responsible person in this context can be an officer of a corporation, a partner, a sole proprietor, or an employee of any form of business. It can also include a trustee or agent with authority over the business's funds. "Willfully" in this context means voluntarily, consciously, and intentionally. Using available funds to pay other creditors when a business is unable to pay employment taxes is considered an indication of willfulness.
If the IRS determines that an individual is a responsible person, they will receive a letter stating that the IRS plans to assess the TFRP against them. The individual then has 60 days (or 75 days if outside the United States) to appeal the proposal, after which the penalty will be assessed and a Notice and Demand for Payment will be sent. Once the penalty is asserted, the IRS can take collection action against the individual's personal assets.
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Collection Information Statement
A Collection Information Statement (CIS) is a form that the IRS may require you to complete before approving a request to delay collection actions due to financial hardship. The CIS helps the IRS evaluate your ability to pay your tax debt and includes details about your financial status, such as assets, monthly income, and expenses.
- Form Variations: There are different versions of the Collection Information Statement, including Form 433-F, Form 433-A, and Form 433-B. The specific form you need to complete may depend on your individual circumstances, such as your filing status or the type of tax debt involved.
- Financial Information: The CIS will require you to disclose detailed financial information. This includes your sources of income, such as salary, investments, or business income. You will also need to provide information about your monthly expenses, such as housing costs, utilities, transportation, food, and other personal or household expenses. Additionally, you must disclose information about your assets, including bank accounts, investments, real estate, and personal property.
- Supporting Documentation: When completing the CIS, you may be asked to provide supporting documentation for the financial information you disclose. This could include pay stubs, bank statements, tax returns, or other records that verify your income, expenses, and assets. Gathering this documentation in advance can facilitate the completion of the form and support your request for a delay in collection.
- Accuracy and Honesty: It is essential to complete the CIS accurately and honestly. Provide as much detailed and current information as possible. Inaccurate or incomplete information may lead to delays in processing your request or, in some cases, rejection of your request for a collection alternative.
- Collection Alternatives: Submitting a CIS does not guarantee that the IRS will approve your request for a delay in collection. However, it is one of the steps in exploring collection alternatives. The IRS may consider other options, such as an Offer in Compromise (OIC), where you propose to settle your tax debt for less than the full amount owed, or a payment plan that allows you to pay your debt over time.
- Seek Professional Guidance: Completing a Collection Information Statement can be complex, and it is important to understand your rights and options. Consider seeking guidance from a tax professional or a tax attorney, especially if you have a complex financial situation or significant tax debt. They can help you navigate the process, ensure you provide the necessary information, and protect your interests when dealing with the IRS.
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Frequently asked questions
The first step is receiving a bill for the amount you owe, which includes the tax amount, penalties, and interest accrued on the unpaid balance.
The IRS can take several actions, including issuing a Notice of Federal Tax Lien, levying bank accounts or property, and assessing penalties. They may also contact you by phone or mail to discuss payment options and provide resources.
Yes, you can request a delay in collection by reporting your account as currently not collectible if you are facing financial hardship. However, your debt will continue to accrue penalties and interest until it is paid in full.
