Our Blog

How IRS Collections Works

You might wonder what would happen if you partially paid your tax returns or didn’t file any returns. In such a scenario, the IRS quickly employs the following steps to collect what you owe them:

The First Notice

The first notice kickstarts the collection process, which continues to the day you pay the taxes in full or the collection period expires. After failing to file your tax returns within the given period, you will receive the first bill. This indicates the amount owed, interest accrued and any penalties accumulated from the due date.

 

It would be best if you settled the balance due by all means after receipt of this first notice. Otherwise, the unpaid balance will continue to attract huge interest daily until the penalty period stipulated by the law is up. Furthermore, you can pay as much as you can afford and then make arrangements for future payments.

Payment Plans

Sometimes people want to comply but lack the means to settle the balances. Don’t just ignore the first notice and hope that somehow the taxes will go away. The IRS allows defaulters to pay over a longer period if they qualify for one of their numerous payment plans.

The agency offers installment agreements to taxpayers who cannot pay taxes due within six months. Call the phone number written on the bill to request a payment plan. Betters still, complete Form 9465 and send it with the bill to the agency by email. You can also request a payment plan online through the OPA app.

Offer in Compromise

Under this arrangement, the IRS may agree to forgive your full tax liability if you pay a smaller agreed amount. To qualify for the OIC, you must have:

• Filed all tax returns
• Received a collection notice on one of the tax debts listed on the offer
• Paid all the tax returns for the current year
• Paid all federal tax required in the current quarter
• Paid all federal tax deposits for the prior two quarters for entrepreneurs with employees

To confirm whether you qualify for this offer, speak with your lawyers or use the tax help network to gauge eligibility. Please note that taxpayers currently battling bankruptcy are not eligible for the OIC (Offer In Compromise).

Not Collectible Status

If all the above remedies have failed, this should be your last attempt at settling the bill. Sometimes the odds may be stacked against you, and you cannot afford to settle your tax obligation because of financial hardship. In this case, you can request the IRS to delay the collection process until your financial condition improves.

You must fill out a form known as the Collection Information Statement for the agency to review. Please note that sob stories and flimsy excuses don't work on the agency. You have to prove your current financial status by showing them your monthly expenses, income, and assets.

Please note that the IRS will review your ability to pay after the agreed period. Also, the debt will continue to accrue penalties and interest as before. Luckily, you are spared from select collection actions during the said period.

The Federal Tax Lien

At this point, nothing can salvage your relationship with the IRS. They will be on your neck until they fully recover the amount owed plus penalties. The agency will slap you with a Notice of Federal Tax Lien.

The notice is bad news because it makes the creditors aware that you are a tax defaulter, negatively affecting your credit score. The notice also allows the agency to auction your assets, including the property you will acquire in the future, until the tax debt is fully paid. The notice will last until the IRS cannot legally collect the amount due.

However, the above collection process has limitations, as we will see in the next section.

 

The ITS Statute of Limitations on Collections

The statute of limitation spells out the period the IRS can legally collect the due debt, interest, and penalties from the taxpayer. Typically, the agency cannot collect the amount due after ten years from the day you receive the first bill. However, the period of limitations can be suspended or extended depending on the circumstances.

There are periods when the law bars IRS from taking collection action against defaulters, for instance, when you’re involved in an active bankruptcy case. The IRS will add the suspension period on top of the ten years. Earlier, the IRS would force the taxpayer to extend the period, which is now illegal.

 

New Initiatives at IRS

It is bad enough when taxpayers cannot meet their tax obligations. Some defaulters are forever stuck in the debt cycle because of the compounding penalties and interests. Thankfully, the IRS has embarked on new initiatives such as modernization programs and tax relief programs to relieve the taxpayers of the burden.

The Fresh Start Initiative

This is a relief program offered to first-time offenders. The initiative enables those already implicated to clear their debt within six years in installments, depending on their liquidity and current earnings. The program also increases the amount that can trigger the Feral Tax Lien from $10000 to $25000, leading to fewer filings.

Offer in Compromise

The OIC is another tax relief initiative. As mentioned above, the taxpayer can fully settle the amount owed by paying a smaller pre-agreed amount.

Taxpayer Relief Initiative

As you can recall, COVID-19 hit the economy hard, and the IRS decided not to make collections during that period. The pandemic is over, but businesses are still recuperating, forcing the IRS to initiate the new Taxpayer Relief Initiative. The initiative allows the taxpayer to extend the payment period for six months.

Also, the program uses the Offer In Compromise to make payment easier.

Lastly, when you have exhausted all the tax relief avenues, you can request the IRS to halt the collection process during this period of hardship.