Your passport has been suspended and a pair of IRS special agents are knocking at your door. This is basically the worst case scenario that someone who has failed to pay his or her taxes can expect, short of a criminal conviction and prison time. The IRS collection process can be intimidating, but with some basic knowledge and help from your tax advisor, one can avoid this unpleasant scenario.
There are two important assumptions in this article. First, the taxpayer can afford to pay the tax, even if it is over a period of time. The IRS offers alternatives that include delaying payment (with an installment agreement, to be discussed) and paying a reduced amount (with an offer in compromise) to those who truly cannot pay their taxes. These options and the process to apply for them are beyond the scope of this discussion. Second, the taxpayer does not dispute the amount due. If the taxpayer disputes the amount, the appeals or protest process can be used if applied for timely, and the conclusion will depend on the facts of each specific case. This process is also beyond the scope of this discussion, but taxpayers should not bypass either of these two topics as they navigate the collection process.
The Collection Process
Regardless of whether a taxpayer has filed a return, the collection process starts with the IRS. If a taxpayer filed a return without paying the reported tax, then the IRS collection process will reference the liability reported on the return, including any necessary adjustments or recalculations. If the taxpayer has not filed a return, then the IRS will create what it calls a “substitute for return” (SFR). An SFR is essentially an IRS-prepared tax return that utilizes all of the income known to the IRS from third-party sources, such as W-2 and 1099 Forms. An SFR does not contain any deductions, and it will not include any credits other than for taxes withheld. As a result, an SFR will generally show a higher balance due than what would have been calculated by the taxpayer. Once an SFR is prepared by the IRS, the burden shifts to the taxpayer to prove that the actual liability should be less. Thus, a taxpayer should always file a return, even if he cannot pay the tax due at the time he files the return.
Once the tax liability is set, the IRS will send a bill for the unpaid balance and will specify a payment due date. This bill will explain any penalties that are included, and will include the interest charges with respect to the unpaid balance. Moreover, interest accrues until the full liability is paid, and a “failure to pay” penalty will also be applied during each month that the balance remains unpaid.
For taxpayers who cannot pay the entire balance currently, this is the best time to request a plan to pay off the amount due over time. As previously mentioned, this is called an installment agreement and it can be requested via the IRS website, by mailing Form 9465 Installment Agreement Request, or by calling the IRS. Requests submitted via the website are the preferred option, as IRS staff is limited and phone and mail service have been adversely affected by the pandemic. If the taxpayer cannot (or will not) pay the amount due, then the IRS collection process moves on to the liens and levies phase.
Liens and Levies
In this next step of the collection process, the IRS will send the taxpayer a document that states the IRS intends to place a lien on the taxpayer’s property. This is followed shortly by filing a “Notice of Federal Tax Lien” with county clerk’s office. This is the notice to alert creditors that the government has a legal right to the taxpayer’s property. This lien attaches to all property and rights to property owned prior to and acquired after the lien is place. A federal tax lien can prevent a taxpayer from obtaining credit, and may even make selling property more difficult. Once the lien has attached, the IRS generally cannot remove the lien unless it was placed incorrectly, or unless the taxpayer has agreed to pay the tax under an installment agreement. In less common circumstances, the IRS also can remove the lien when the taxpayer can demonstrate that the tax will be paid more quickly if the lien is removed, or if removal is in the best interest of the taxpayer and the government.
If a taxpayer continues to ignore the IRS, the IRS begin to seize the taxpayer’s assets by using a levy. The IRS will first send the taxpayer a “Notice of Intent to Levy.” The IRS can seize any property owned by the taxpayer, including wages, bank accounts, social security benefits, and retirement income. The IRS also may seize a taxpayer’s tangible property, including cars, boats, or real estate, which it will sell to reduce or eliminate the tax liability. In addition, any future federal tax refunds or state income tax refunds due may be seized and applied to the taxpayer’s federal tax liability.
IRS Communications during the Collection Process
At each point during the IRS collection process, the IRS communicates with the taxpayer by mail or in person. The IRS does not contact taxpayers by email, and the IRS generally will not contact a taxpayer by phone. Taxpayers contacted by phone or email and suspect fraud should contact the IRS or their tax professional to determine if the communication is valid, and to ensure that their accounts remain secure.
Also, each notice that the IRS provides by mail will contain information on the taxpayer’s rights to a hearing or to appeal the amount due. These rights are time-limited and typically expire after 90 days. Furthermore, the appeal processes may suspend the 10-year period that the IRS generally has to collect the tax, depending on the nature of the appeal. Generally, the IRS will not seize property during the appeals process in most cases, although they are not statutorily prohibited from doing so.
Passports and Visits from the IRS
The IRS has special agents that may also be involved in the collection process, in addition to a possible passport revocation. The IRS will only act against a taxpayer’s passport if the taxpayer has a seriously delinquent tax debt. The threshold for seriously delinquent is indexed for inflation and currently stands at $54,000. The IRS will not proceed against a taxpayer’s passport until the aforementioned federal tax lien and federal tax levy have been filed. Once a taxpayer’s passport has been revoked, the State Department will send the taxpayer a notification that his passport has been invalidated.
IRS special agents are just one of three classes of IRS employees that may visit a taxpayer’s home or business, though they are the most worrisome. The first class of IRS employees that may drop in on a taxpayer is a revenue agent. These individuals generally only determine the appropriate amount due, and do not pursue any collections actions. Generally, revenue agents conduct field audits and examinations. The next class is the revenue officer. As the IRS collection process escalates, so does the power of the IRS employee. Revenue officers only work on the collection of tax debts, and they are prohibited from considering whether the debt is valid. In other words, they will not listen to taxpayers’ claims that they do not owe the money. They can seize property through the levy process. Their mandate is to collect the tax due as quickly as possible.
The final class of IRS collection employees is the most serious. These are the IRS special agents. These individuals carry guns, and while they do not directly pursue criminal charges, they may refer a taxpayer for criminal prosecution. Think of them as the FBI for the IRS. A taxpayer will generally only encounter IRS special agents (who are always sent in pairs) for serious tax crimes. A high income taxpayer, defined by the IRS as someone who makes more than $200,000 annually, who repeatedly fails to file a tax return may receive a visit from an IRS special agent. It is more likely that the IRS will first follow the lien and levy process for such non-filers, using the SFR previously discussed. If a taxpayer receives a visit from special agents, it is far more likely that they are investigating a serious tax crime such as fraud.
The most important thing to remember about unpaid tax liabilities is that there are multiple steps to the IRS collection process. The IRS will provide notice and appeals rights at each step. These rights are time–limited, so it is very important to communicate with the IRS and your tax professional as soon as the first bill arrives. This is equally true even when one cannot pay the amount due. The alternatives to full payment may expire or become less practical once the IRS begins the collection process. The most severe of IRS responses occur only after a taxpayer repeatedly ignores or fails to adequately respond to earlier steps in the IRS collection process. For more advice on dealing with the IRS please contact us.
Published on August 03, 2021