The Internal Revenue Service has been fairly lenient with overdue tax bills during the pandemic, but collection efforts are back in full swing this tax season.
The agency is stepping up efforts to collect overdue taxes after many debt collection efforts were suspended during the worst of the COVID-19 crisis. In March 2020, the IRS temporarily halted some debt collection activities and subsequently expanded the pause in February 2022 to include a suspension of collection letters, including property seizure notices.
“The IRS is gradually resuming sending collection notices and collection letters that were suspended during the pandemic,” the agency said in a statement.
You may receive one if you had back taxes before the 2022 tax year.
While the reduced enforcement of debt collections was at least partly intended to provide relief to taxpayers, the IRS also had a serious bandwidth problem. The agency was previously dealing with a major backlog of pandemic-era tax returns.
Then came the injection of money to the IRS from the Inflation Reduction Act. Now that the agency has begun receiving portions of this funding, which will be distributed over a 10-year period, the IRS has been able to implement new technology to speed up returns, reboot collection efforts and even launch a test of its free tax filing software.
Now, the IRS is ready to resume normal debt collection efforts in earnest.
What is the IRS debt collection process?
While you may not have received notices about your overdue tax bills during the pandemic, national taxpayer advocate Erin Collins warned in a blog post that you shouldn’t assume the IRS has forgotten about your debt.
“The IRS remembers those outstanding balances,” he wrote, “and until the balance is paid, applicable interest and penalties continue to accrue.”
As the IRS resumes collecting back taxes, the agency says it will first send you a “special reminder letter” called LT38 letting you know that normal debt collection procedures are back in effect. The letter should also show your balance and provide information on how to pay (or ask for assistance).
Because collection notices have been suspended for so long, the IRS says nonpayment penalties for tax years 2020 and 2021 will be waived for millions of taxpayers. However, the underlying balance is due.
After receiving the special reminder, the normal sequence of letters will follow if you do not pay. You can expect a CP-14 notice, which is a balance owed letter, requiring payment within 21 days.
Next, the IRS may send up to three additional letters to remind you of your balance (CP-501, CP-503, and CP-504).
The final notice, CP-504, warns that if you don’t pay your past due balance immediately, the IRS may seize your property, income tax refunds, wages and bank accounts.
In cases with a large outstanding balance, a physical IRS revenue officer may also be involved. Last summer, the IRS said it was over not announced, in-person visits by the IRS. But an official may still contact you to request an in-person visit, which could take place at your home, business or local IRS office.
(Note: These agents have always been unarmed and will not threaten you with arrest or demand payment by card or wire. Check the IRS tax scam resources if you believe the person contacting you is an impostor.)
What to do if you owe the IRS a debt and can’t pay
If you don’t pay your taxes by the due date, you could be hit with some nasty penalties, plus interest that accumulates daily. The penalty for nonpayment is 0.5% of the unpaid tax balance for each month it remains unpaid, up to a maximum of 25%. Additional penalties apply if you also have not filed a tax return.
The IRS is generally willing to work with you – and even reduce your penalties – as long as you contact the agency in a timely manner with a reasonable explanation (and the problem is not due to “wilful negligence” or fraud).
“The absolute worst thing taxpayers can do would be to ignore these balance due notices or any other letters and notices from the IRS,” Collins previously wrote.
The longer you wait, the higher the penalties will be. Ultimately, the IRS can seize your property, including your car, boat or real estate, if you don’t comply.
If you are unable to make payments on your balance due to financial hardship, you may be able to temporarily delay collection by being deemed “uncollectible” by the IRS. “Being currently uncollectible does not mean the debt goes away,” the IRS website explains: “It means that the IRS has determined that you cannot afford to pay the debt at this time.”
To make your case, you will need to contact the IRS at 800-829-1040 or by calling the telephone number on your bill or collection letters. Keep your financial information close at hand.
Additionally, the IRS offers numerous other payment plans.
Short-term payment plan
A free 180-day repayment plan is available if you owe the IRS less than $100,000 in combined taxes, penalties and interest. You can request this type of plan online.
Long-term payment plan
Setting up a long-term payment plan will likely cost you between $31 and $130 depending on your payment method. You can apply online if you owe $50,000 or less in combined taxes, penalties and interest. If your tax bill is higher, you will need to request it manually using Form 9465. This type of plan is also called an installment agreement.
Compromise offer
An offer in compromise is a request to settle your tax debt for less than you owe, primarily due to financial hardship. The process is lengthy, and application fees typically start at $205 plus an initial tax bill payment.
If your payment plan or settlement request is denied, or if you disagree with other debt collection efforts, you can also fight the collection process with an appeal, which will typically prevent the IRS from collecting the debt until resolution of the appeal.
What are the consequences of failing to pay the IRS?
Ultimately, not paying the IRS the taxes you owe is incredibly consequential.
In addition to the high fees and penalties mentioned above, the IRS can place a lien – a legal claim – on almost all of your current and future property after you neglect or refuse to pay your taxes. This includes your home, car, or other property, as well as your financial accounts and many types of government benefits (including Social Security payments).
When the IRS files a lien, which is a federal tax lien notice, your debt becomes public, alerting your creditors that the government has a claim on your property. Technically, liens don’t automatically appear on your credit report. So your credit score may not change, but creditors can access this information, and a lien will likely hurt your chances when you apply for new credit.
Before the IRS seizes (i.e. levies) your property, it will send you a tax bill and several notices in accordance with standard collection procedures, and you will have the right to a legal hearing at least 30 days beforehand.
In more serious cases, an IRS revenue officer may become involved and require in-person meetings. The IRS may also begin contacting neighbors, relatives, employers, or banks about your situation. If your debt and penalties exceed $51,000, the IRS may notify the U.S. Department of State of your tax debt, and the department may not issue or renew, and even revoke, your passport.
How to Pay the IRS After Debt Collection
The best way to contact the IRS and pay your debt is to follow the instructions in the agency’s official mail.
The letter typically lists your tax debt, a due date, and other information about setting up alternative payments or disputing the amount.
If you’re unable to pay the entire bill, the IRS says you should first pay what you can. In-person, online and telephone payment options are available via cash, debit card and credit card. After paying as much as possible, you should set up a short-term or long-term payment plan or payment in compromise (as noted above) to avoid further escalation of your debt.
Sometimes, the IRS assigns your case to a private collection agency. Before doing so, the IRS will notify you in writing of the agency to which it has assigned your account and will provide you with a 10-digit code that you will need to verify with the collection agency before setting up tax payments. The collection agency must also send a separate letter confirming the account transfer.
The IRS typically uses third-party agencies only for older cases or when the agency simply doesn’t have the resources to stay in contact with you directly.
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