IRS Collection Letter

What you need to know about IRS notices

Before pay­ment or col­lec­tion of taxes, the Inter­nal Rev­enue Ser­vice is required to deter­mine a taxpayer’s lia­bil­ity and make an assess­ment which is recorded in the IRS sys­tem. The recorded infor­ma­tion includes the taxpayer’s name, social secu­rity num­ber, year in ques­tion and the amount and type of tax involved. Also included is the assess­ment date which is impor­tant because it trig­gers two statutes of lim­i­ta­tions: (1) the time within which the tax­payer must receive a notice of tax due and a demand for pay­ment and (2) the time within which the tax may be col­lected. Each tax assess­ment has a col­lec­tion statute expi­ra­tion date (CSED) which ends the government’s right to pur­sue col­lec­tion of a tax liability.

Statu­tory Notice and Demand. The IRS must send notice to the tax­payer with the unpaid tax amount and demand pay­ment within 60 days from assess­ment. If the IRS fails to com­ply, the assess­ment will remain valid but the IRS will be barred from issu­ing liens, levies and wage garnishments.

The 30-day Let­ter or ‘Notice of Pro­posed Changes’. noti­fies the tax­payer that an adjust­ment is being pro­posed and con­tains instruc­tions on how to appeal the pro­posed defi­ciency. This let­ter com­monly referred as the “30-day let­ter” because it gives the tax­payer 30 days to start the appeal process or pay the tax. Since this is not a statu­tory notice, the IRS may grant the taxpayer’s request for an exten­sion of time to reply to this notice. This let­ter is also received when a tax­payer ignores the IRS audit.

Notice of Defi­ciency. When a tax­payer does not respond to a Notice of Pro­posed Changes, a “Statu­tory Notice of Defi­ciency” will be received. Also called “90-day let­ter,” it is a legal deter­mi­na­tion that is pre­sump­tively cor­rect and con­sists of the following:

  • A.) A let­ter explain­ing the pur­pose of the notice, the amount of the defi­ciency, and the taxpayer’s options;
  • B.) A waiver to allow the tax­payer to agree to the addi­tional tax liability;
  • C.) A state­ment show­ing how the defi­ciency was computed;
  • D.) An expla­na­tion of the adjustments.

The pur­pose of a notice of defi­ciency is to ensure the tax­payer is for­mally noti­fied of the IRS’s inten­tion to assess a tax defi­ciency and to inform the tax­payer of the oppor­tu­nity and right to peti­tion the Tax Court to dis­pute the pro­posed adjustments.

A notice of defi­ciency is issued to re-determine the defi­cien­cies of income, estate, or gift tax lia­bil­i­ties as well as for cer­tain excise taxes. It is also received when tax­payer dis­agrees with the find­ings of the Appeals office.

If the tax­payer fails to respond to the first notice of tax due, then the IRS may likely to send up to four more notices before com­menc­ing col­lec­tion activ­ity. The four notices are: Reminder on Unpaid Taxes or Bal­ance Due (CP-501), 2nd Reminder on Unpaid Taxes or Bal­ance Due (CP-503), Notice of Intent to Levy on Bal­ance Due (CP-504), and Final Notice of Intent to Levy and Notice of Your Right to a Hear­ing (CP-90). This last notice explains the rights that the tax­payer has under before the actual levy action is started. If tax is not paid after assess­ment and notice and demand, a lien in favor of the IRS auto­mat­i­cally occurs. This is some­times referred to as a “secret” lien.

Statu­tory Notice of Lien. A fed­eral tax lien is the government’s legal claim against your prop­erty when you neglect or fail to pay a tax debt. The lien pro­tects the government’s inter­est in all your prop­erty, includ­ing real estate, per­sonal prop­erty and finan­cial assets. IRS must notify a tax­payer of the fil­ing of a fed­eral tax lien within 5 busi­ness days after the fil­ing of the notice of lien. After this 5-day period the tax­payer has only 30 days to appeal the fil­ing of the lien. If the IRS deter­mines that it failed to prop­erly pro­vide a tax­payer with notice, it will promptly pro­vide the tax­payer with a sub­sti­tute notice and pro­vide the tax­payer with an oppor­tu­nity to appeal the fil­ing of the lien.

Statu­tory Notice of Levy. A levy is a legal seizure of your prop­erty to sat­isfy a tax debt. Levies are dif­fer­ent from liens. A lien is a claim used as secu­rity for the tax debt, while a levy actu­ally takes the prop­erty to sat­isfy the tax debt. IRS must notify tax­payer of its intent to levy at least 30 days prior to the date of the first levy. Tax­payer can request an appeals hear­ing only dur­ing this 30 day win­dow (an appeals hear­ing will toll the statute of lim­i­ta­tions on levy actions, col­lec­tions, pros­e­cu­tion of crim­i­nal mat­ters, and all suits for the period of the appeal).

Statu­tory Notices of Liens and Levies must pro­vide infor­ma­tion on the taxpayer’s right to a col­lec­tion due process hear­ing (CDP hear­ing). Within 30 days after a deter­mi­na­tion deny­ing the taxpayer’s chal­lenge to a Notice of Lien or Levy at a CDP hear­ing, the tax­payer may appeal the denial to the Tax Court.

Find­ing the appro­pri­ate res­o­lu­tion to a tax case will depend on the time­li­ness and man­ner that a par­tic­u­lar notice is processed or han­dled. In fact, the IRS sends out 200 mil­lion notices and let­ters to tax­pay­ers or their rep­re­sen­ta­tives each year. It is by far the agency’s over uti­lized com­mu­ni­ca­tion tool relied upon in IRS inter­ac­tions with every tax­payer and encour­age vol­un­tary com­pli­ance. If the tax­payer fails to respond to these notices, the IRS may then levy prop­erty, seize and sell the prop­erty, file a tax lien, and gar­nish wages and other pay­ments. Cur­rently, the IRS is in the process of redesign­ing its cor­re­spon­dence with tax­pay­ers. Last year, 22 new and redesigned notices were added to its pro­duc­tion, the IRS recently formed a ser­vice wide research and analy­sis team to eval­u­ate the effec­tive­ness (for clar­ity, effec­tive­ness and effi­ciency) of the new and redesigned notices. The new for­mat includes a plain lan­guage expla­na­tion to help the tax­payer in under­stand­ing the basic pur­pose of the notice and clearly states what steps they should take in response.

Notwith­stand­ing some imper­fec­tions in the IRS sys­tem, inter­na­tional stud­ies show that the U.S. tax sys­tem is the most effi­cient and effec­tive in the world. with nearly 84 per­cent of all taxes in the United States cal­cu­lated cor­rectly and paid on time by tax­pay­ers who report their income freely and vol­un­tar­ily. How­ever, the U.S. con­tin­ues to have a siz­able “tax gap” – the dif­fer­ence between what is owed in taxes each year and what is paid vol­un­tar­ily and on time.

If you received a col­lec­tion notice from the Inter­nal Rev­enue Ser­vice please con­tact our offices imme­di­ately. With an A+ Rat­ing from the Bet­ter Busi­ness Bureau and an active mem­ber of the Amer­i­can Soci­ety of Tax Prob­lem Solvers, we have the expe­ri­ence to help tax­pay­ers across Amer­ica with afford­able per­ma­nent solu­tions to their tax prob­lems. Visit TheTaxAttorney.com or call (855)829‑4771 or (855) TAX-IRS1.

IRS Collection Letter