IRS Collection Notices Overview
What Is an IRS Collection Notice?
The IRS sends out millions of notice letters every year to taxpayers about audit issues, penalty issues, un-filed tax return issues, collection/enforcement issues, and a number of other issues and items. Most of these notices are automated and sent to taxpayers from various IRS centers around the Country.
An IRS Collection Notice is a general term for any one of several notices that will be sent to the taxpayer once an IRS debt is entered into the system.
It's important for the taxpayer to understand what each of these collection-related notices are as they provide information about the taxpayer's rights, deadlines related to collection action like wage garnishment or bank account levy, and requests for specific actions to be taken on the part of the taxpayer.
The IRS Collection Notice “stream”
The IRS' collection notice stream begins when the IRS “assesses” a debt against a taxpayer. A debt is “assessed” when a return is filed with a balance due. The assessment includes the balance due plus any portion of penalty and interest owed as of the date of assessment.
Once the debt is “assessed” the following letters are sent to the taxpayer:
CP 14 - Balance Due Notice
The CP 14 letter is the first letter sent of the “stream” of letters. It's sent in order to provide an initial notice of the balance owed with it's principal, penalties, and interest assessed. If the taxpayer doesn't respond to the IRS when this letter is received, doesn't pay the debt, or enter into a payment plan, the IRS can't take collection action unless an LT11 or L1058 have been issued on the particular year previously and the CP 14 has been sent a second time thereafter.
CP 501 - Reminder Notice
The CP 501 letter is a reminder notice regarding the balance due. It warns of collection action including lien notice filing if no response is provided and payment made, or other arrangements are made. If the debt is above $10,000.00, the IRS can record a lien notice and sometimes will after this letter is sent and no response or arrangement is made. However, the IRS can't levy based on the CP501 notice. Again, the LT11 or L1058 letter(s) must have been sent in order for the IRS to garnish wage or levy an account.
CP 503 - Second Reminder Notice
The CP 503 letter is a second reminder notice regarding the balance due. It again warns of collection action including lien notice filing if no response is provided and payment made, or other arrangements are made. If the debt is above $10,000.00, the IRS can record a lien notice and sometimes will after this letter is sent and no response or arrangement is made. However, the IRS can't levy based on the CP503 notice. Again, the LT11 or L1058 letter(s) must have been sent in order for the IRS to garnish wage or levy an account.
CP 504 - Third Reminder Notice
The CP 504 letter is a third reminder from the IRS about the debt. It contains a more serious “tone” and tells the taxpayer that is a FINAL notice before collection action is taken.
The IRS can record a lien notice in relation to this debt as it was able to due prior to this notice. It can also seize any state tax refund, look for assets and income, and send notice to the U.S. State Department about taking steps to freeze a passport.
The CP 504 is misleading.
If not read carefully, the taxpayer will often come away with the impression that the IRS can garnish wages and levy bank accounts 30 days after the date on the notice. This is usually because the letter contains more direct “final notice” language.
If closer inspection is made, the taxpayer will notice that the letter explains that the IRS may send a notice regarding a right to a hearing before the IRS Independent Office of Appeals and that the IRS can then seize (levy) income, accounts, assets, and social security benefits.
LT11/L1058/CP90 - Final Notice of Intent to Levy
The IRS LT11, IRS L1058, IRS CP90 letters are the “true” final notice letters before the IRS will garnish wage or seize assets including bank account funds.
These are the “true” final notices because they contain a notice of the taxpayer's collection due process appeal rights with instructions regarding how to ask for the appeal.
The IRS can issue liens, seize state tax refunds, and block passports before this letter is sent but it can't garnish/levy/seize until more than 30 days have passed from the date on the letter.
If the IRS sends the letter to the last known address it had on record for the taxpayer, and the taxpayer doesn't request a collection due process as a result of non-receipt, the IRS can still levy/seize/garnish as it's the taxpayer's duty to keep the IRS apprised of any new addresses.
The collection due process hearing can be used to propose collection alternatives to the IRS and in some instances, contest the tax and/or penalty amounts.
3172 Letter - Notice of Federal Tax Lien
An IRS debt gives the IRS a lien against the taxpayer's assets by rule. This is why the IRS doesn't have to sue to collect. No Court Judgement is necessary for an IRS lien to exist.
However, the lien is “secret” in that no one knows about it unless the IRS records a “Notice of Federal Tax Lien” in the county recorder's office. The IRS won't record this lien notice with the county in certain situations, and it will release or withdraw the lien notice in other situations.
The 3172 letter is the notice the IRS sends to the taxpayer AFTER this lien notice is recorded. It provides the taxpayer an explanation about lien notice appeal rights but doesn't warn the taxpayer that the recording will happen.
CP 508C - Passport Restriction Letter
When the taxpayer owes the IRS more than $54,000.00 (adjusted annually), the IRS can set in motion a process that will result in the restriction of the taxpayer's ability to travel by the U.S. State Department.
This letter tells the taxpayer that he or she is seriously delinquent according to IRC Section 7345 and that the IRS has told the U.S. State Department about that.
Once the IRS receives the notice from the IRS it can deny a passport request or refuse to renew a passport.
The letter typically contains the taxpayer's options to have this process reversed.
Importance of Taking Action
Don't Ignore Any of The Notice Letters Above
If the taxpayer has received any of the above letters, the IRS is actively seeking to collect a debt. If the letter or letters are ignored the taxpayer will eventually be levied, garnished, lien “noticed”, travel restricted, etc.
Use the Letter as Starting Point to Determine Where at In Process
The letter received is usually indicative of where the taxpayer is in the collection process. However, each individual debt has its own collection letter stream. Focus on just one notice, may cause the taxpayer to miss the fact that other notice streams are farther along. The taxpayer should use the notice as an impetus to review the entire situation.
Review Big Picture, Determine Best Option, Follow Through
The taxpayer should determine the big picture by reviewing the entire IRS history and his or her own financial situation. The process is often best done with the help of experienced counsel and can result in the ability to create a “plan” or best option to deal with the IRS problem.
If the “big picture” isn't reviewed, a best plan or option determined and followed within the timeframes that exist, the taxpayer runs the risk of collection action by the IRS.