TAX COLLECTIONS

There are a few ways you end up in collection:

• You owe but don’t pay when you file.

• The IRS makes a swift assessment (probably through the IRT program).

• You end up owing through the examination process, which takes place after an appeal or tax court.

This is why you see collection in the middle of the complex IRS Roadmap. You can go there quickly or after a long, back-and-forth process.

And much like the other areas of the IRS, collection has its own lengthy process, but in this case that’s good news for us. They typically give ample opportunity to settle a balance before going after your assets. Here’s an overview of their general process.

Computer generated notices → 

IRS Automated Collection System (ACS) → 

Assigned revenue officer from the collection division → 

(May) Assign debt to a private agency

For the first several months you’re in collection, you will likely only receive computer-generated notices. Once you get contacted by ACS, it means humans are looking at your files and contacting you.

The IRS relies heavily on computer-generated notices to reduce the workload of its understaffed offices. The notices are called Computer Paragraphs, or CPs. If your letter starts with CP, it means it was made by a computer, not a human.

Most taxpayers get the following CPs in the following order:

• CP-14, You Have Unpaid Taxes

• CP-501, You Have a Balance Due

• CP-503, Immediate Action Is Required

• CP-504, You Have an Amount Due—Intent to Levy

It may take up to six to 12 months to receive this full sequence, but that process may speed up and you may skip some letters for more serious tax issues.

The next letter is CP-90, Final Notice—Intent to Levy and Notice of Your Right to a Hearing. This means you’re being passed off to the next stage in the IRS, which is when things start to get real and should be met with immediate action.

The follow-up is Letter 508, Final Notice, Notice of Intent to Levy and Notice of Your Right to Hearing. Please Respond Immediately. Failure to respond within 30 days may result in levies on your bank accounts or notices to others to garnish wages. They may also issue CP-49, Overpaid Tax Applied to Other Taxes You Owe, which simply means they will start to apply other tax refunds toward your balance.

After all these letters, you go to ACS. The IRS will leverage its authority to collect from you through various ways like bank levies and property liens. If needed—like if you didn’t start reading this book until after you already received all your CPs—you can ask for a temporary freeze hold, which lasts up to 45 days.

Or, if you have few assets and little income, you can file a form 433-F, Collection Information Statement, to request “currently non-collectible” (CNC) status or a “significant hardship case” status. This puts a freeze on IRS collections for 12 or more months. You’d only go this route if you can’t pay with one of the options we’re about to discuss.

To delay the collection process, you can also respond to each bill and ask for 45 more days to pay. That’s the max amount they can give you.

WHAT IF YOU NEVER FILED?

If you never filed your tax return, the IRS can demand you do so with huge penalties. They can also do a “substitute for return” (or SFR). These are super common.

Let’s say you were issued a W-2 and 1099 and never filed a return. The IRS can create a generated return for you. They will claim your income and standard deduction but likely no other tax deductions or benefits, likely resulting in a higher tax balance than you would have had if you’d self-filed. They will then send you a proposed assessment to sign off on and agree to the balance due.

If you don’t agree, you can contest a SFR. Typically, you will need to file an amended return to do so.

Failure to respond to the SFR will result in a Notice of Deficiency. That’s your 90-day letter, which you can contest by filing a tax court case within 90 days.

A NOTE ON TRANSCRIPTS

If you get an SFR and need to create your own return, or if you’re ever missing tax documents for whatever reason, you can get key information at https://www.irs.gov/individuals/get-transcript. Order wage and income transcripts to get a full record of what 1099s, W-2s, and other tax documents the IRS has on file for you. This is super important because, if you’re going back to, let’s say, do tax returns for the last three years, well you better—at minimum—be reporting the income the IRS already has on file for you.

PAYMENT OPTIONS

Let’s rewind now and go back to having a balance owed after you file, before you get sent into the collection process. If you unquestionably owe a tax bill, there are six ways to handle it. “Unquestionably” means you’ve exhausted the examination, appeal, and litigation route, or if you owe when you file and you know you owe without question. If there are questions, or issues, you can always amend your tax returns if you missed something. You should also make sure your balance has been credited properly with payments already made. Here are my six ways:

1. Simply pay in full. Write a check or pay online.

2. Set up a monthly installment agreement with the IRS.

3. Reduce, eliminate, or pay the debt through bankruptcy. (I won’t be covering this option further. If you think it might be an option for you, consult a bankruptcy attorney). That’s serious stuff.

4. Obtain currently non-collectible status (discussed above) and revisit these options later.

5. Reduce the debt through an offer in compromise (covered in the next section).

6. Wait for the statute of limitations to expire, in which case the debt will disappear. This is kind of like playing chicken with the IRS, and you should only be tempted to go down this route if you’ve gone pretty far without IRS contact and/or they really have no way to collect from you.

If you have decent income, option 1 may be your only option. Otherwise, other options may be worth exploring.

PAYING IN FULL

After you file, you can wait until you get a bill to pay. This is a good idea if you only need a month or two to gather your funds. Upon receiving your first bill, you can also request an extension of up to 120 days. But, be careful of the “oh shit” cycle. Consider doing an installment agreement to allow yourself to chop the cycle and start saving for current taxes while paying back tax. I talk more about this in the “My Back Tax Philosophy” section later in the chapter.

INSTALLMENT AGREEMENT

This option is available immediately upon filing and receiving your bill/balance, or after you go through all appeals steps.

You can apply for an installment agreement through the IRS website pretty much anytime. You can also apply for it if/when you efile your return or use the paper Form 9465, Installment Agreement Request.

You must be current on tax filings to apply for an installment agreement. If you’re behind for multiple years, you will file all returns first, find your total tax balance, and apply for an installment agreement for the total.

There are a few different types/categories of installment agreements.

FULL-PAY AGREEMENT

A full-pay agreement is required if you can pay your full tax balance within 10 years. There are a couple subtypes.

A “streamlined agreement” is one in which you can/will pay the full balance within 72 months (six years) and in which your balance owed is less than $50,000. Streamlined agreements get their name because they’re approved almost automatically within 30 minutes of the application.

You can apply at: https://www.irs.gov/payments/online-payment-agreement-application.

To qualify, you must not have had any tax owed or installment agreements within the past 10 years. Non-streamlined agreements simply take longer to get approved and may require more back-and-forth.

If you owe less than $10,000 and can pay in installments within 36 months (three years), you can get a “guaranteed agreement.” These are even easier to get as you presumably are guaranteed approval if you meet the conditions.

I’ve come to the conclusion that the only real thing you need to know about these agreements is the payoff time. Let’s say you owe $9,000. With a $250 monthly payment, it’d take three years to pay your balance, putting you on the cusp of the guaranteed versus streamlined agreement. So maybe you decide you can swing $300 a month in order to fully fall into the “guaranteed” range and have the best chance of approval. Otherwise, your agreements will be largely based on your ability to pay. The nuances should only matter if you’re on the cusp.

PARTIAL-PAY INSTALLMENT AGREEMENT

A partial-payment installment agreement allows you to pay less than your full balance within the statute of limitations to collect (10 years). This is only available if you owe $10,000 or more. The IRS may put liens on your property while you have this type of agreement. They may also request that you liquidate assets to resolve some debt.

To apply for a partial pay installment agreement, you need to complete Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals in addition to Form 9465.

Don’t always assume an installment agreement is your best option. Interest and penalties average out to 6–8%. In our programs and with our one-on-one clients, we help folks balance their tax debts with other debts and financial obligations. You have to look at how it works in the big picture.

OFFER IN COMPROMISE (OIC)

An offer in compromise allows you to make an offer to pay less than the total tax you owe in installments. There are income qualifications for this type of relief. If the OIC is accepted, you must meet certain obligations to eventually dissolve the debt, like meeting future filing and payment deadlines.

Have you ever seen or heard ads that say something like “Do you owe the IRS thousands of dollars? We can help you make your tax debts disappear.” These ads often speak for companies in the business of helping taxpayers through the process of applying for an offer in compromise.

When applying for an OIC, it’s helpful to remember that the agent looking at the application works for the federal or state government. As such, that agent is analyzing the best interests of their respective agency. Their goal is to collect as much as they reasonably can. Therefore, in assessing an OIC, the agent will ask whether the amount offered is the most the agency can expect to collect from the taxpayer within a “reasonable time.”

The application is a bit cumbersome. It asks for all potential income sources and expenses, as well as verification of those income sources and expenses. The applicable agency compares income to expenses to determine how much is left over each month to pay past due taxes. The agent also looks at potential, future sources of income and future expenses. Significant assets may also bar a taxpayer’s likelihood of success. The tax agency’s reasoning is that a taxpayer can liquidate assets like 401(k)s to pay tax debts. Thus, a taxpayer is a good candidate for an OIC when they own few assets and have low income compared to expenses. But don’t let that discourage you. It’s always worth a shot.

There are still a couple more hurdles to qualify. A taxpayer must be up to date with all tax returns before applying. The totality of debts may only be determined after all tax returns are current. The agent will also consider any potential upswings in the taxpayer’s income.

After submitting an OIC with the IRS, the taxpayer must remain in compliance with all provisions of the tax code for five years. This means filing returns on time and paying any taxes owed. Otherwise, the taxpayer’s offer will be negated and the debt will revert back to the pre-offer amount.

During and after my tax program, I volunteered at our local Low Income Taxpayer Clinic. The clinic provides pro bono representation for all types of issues. I talked to individuals who made millions, owed millions in taxes, and lost it all in the 2008 recession. I spoke with low-income individuals who’d won healthy sums of money in casinos. They never paid the tax and the IRS came knocking. And sadly, I talked to a lot of taxpayers who had hired shady tax preparers.

The preparers would run various types of schemes. Sometimes it’d take a couple years for the letters to roll in from the IRS. (Quick tip: Always get a referral for tax return prep, or just hire us. We don’t do schemes. I promise. And never hire someone who promises a certain amount you will be refunded.)

While working at the clinic, OICs were far and away the most common task we’d work on. My boss, who ran the clinic, had it down to a science, and could tell you what offer you could give and how long it’d take to accept.

It was also quite common for clients to come in several years behind on tax filings. First, we would get the returns up to date. Then, we could determine the total tax owed and proceed with the OIC.

If you have outstanding tax liabilities and meet the criteria in this section, contact a tax lawyer to discuss options. An OIC may be a great option.

HOW TO FILE AN OIC

Google “IRS Form 656.” Locate and download the form. Then, search for the “IRS Form 656 instructions." Follow the instructions, fill out the form, and send it in according to the instructions.

There’s a typical application fee of about $180. Individuals can qualify for a low-income exemption from the fee if AGI falls below 250% of the federal poverty guidelines, which is $31,255 for a household of one in 2019.

CURRENTLY NON-COLLECTIBLE

If you’re in financial hardship, you can request to go on “currently non-collectible” status. This is an option to look into when you’re receiving communication from the IRS that they plan to levy your bank account. It’s a temporary fix to pause their collection efforts against you while you either get back on your feet or plan your back tax strategy.