The road to the collection process begins with an assessment of the tax due. Once the government makes an assessment, it has the right to pursue payment administratively for a period of ten years, or to bring a judicial remedy within that time. Deficiency assessments arise only after a lengthy process of administrative and judicial determination of a taxpayer’s correct liability that begins with the Service examining a tax return (or filing one on behalf of a delinquent taxpayer) and ends with a settlement between the parties or a decision of the court. The process is marked by notices called 30-day letters or a 90-day Notice of Deficiency. As deficiencies are not self-determined, as the tax on a return is, the government may not assess, and therefore may not begin to collect, the amount asserted by the government until the matter is finalized.
The Service will normally place collection activity on hold while the taxpayer or his representative is constructively working with the agency. In some cases, this is accomplished informally and by administrative fiat; in other cases, the statute requires it. The Internal Revenue Manual gives collection personnel significant discretion in handling a balance due account. The Service employee will typically suspend collection activity if asked by a representative.
If the amount owed is correct and no defenses are available, there are still other avenues available to reduce the amount of tax the taxpayer owes-several are administrative and one is judicial. The administrative approaches are to ask the Service to compromise some of the tax due by filing an OIC, requesting that the Service place the account in CNC status, or seeking to pay the liability over time by means of an installment agreement. In most of these situations, the Service will require that the taxpayer complete financial statements.
An OIC can be based on doubt as to collectability or on equitable grounds, commonly referred to as “effective tax administration.” An OIC is like a “workout” plan or an administrative bankruptcy between the Service and the taxpayer via tax debts. When in CNC status the Service suspends all further collection activity. With an installment agreement, the taxpayer agrees to pay the tax, penalties, and interest over a period of time that does not overly burden him. If agreed to, the Service acts, in essence, as a lender. The judicial approach is to file a petition in bankruptcy and seek to discharge the taxpayer’s tax debts along with the other debts that are dischargeable.
Within about ten days after the Service makes an assessment, someone enters the information in the computer system. This initiates the series of Service Center notices:
The first notice (Request for Payment), mandated by section 6303, informs the taxpayer that there is tax due, states the amount of tax, interest, and penalties, and demands payment within ten to 21 days (depending on the nature of the taxpayer and the amount involved).
The next letter, Notice or CP-501 (Reminder of Unpaid Tax), is issued about five weeks after the first one if the taxpayer has not paid the amount demanded, or at least contacted the Service. This and subsequent notices do not repeat the details about the amount of tax and penalties, but do contain an updated amount for interest.
In the absence of payment or taxpayer contact, the Service sends Notice or CP-502 (Overdue Tax) in approximately another five weeks.
Five weeks later, if the taxpayer has still taken no action, Notice or CP-504 (Urgent – We Intend to Levy on Certain Assets. Please Respond Now) is sent by certified mail. Its issuance satisfies the statutory requirement contained in section 6331(d) of notice before levy. The notice states that if the Service does not get full payment within 30 days from the date of the notice, it may file a tax lien and will begin to search out assets upon which to levy. This one is vital and must be responded to immediately.
After another five weeks from the issuance of the Notice 504, if nothing is arranged, the ACS office or the Revenue Officer will issue either Letter 1058 (FINAL NOTICE-NOTICE OF INTENT TO LEVY AND NOTICE OF YOUR RIGHT TO A HEARING-PLEASE RESPOND IMMEDIATELY) or Letter 3172 (NOTICE OF FEDERAL TAX LIEN FILING AND YOUR RIGHT TO A HEARING UNDER I.R.C. 6320). Which letter the Service sends depends on whether the taxpayer has assets, whether the amount of tax is large, and whether the taxpayer is a repeater. These letters, along with Publication 1660 (Collection Appeal Rights), advise the taxpayer of his CDP rights. Collection Appeal Rights, Publication 1660. The letters also include, “in simple and nontechnical terms,” an identification of the amount involved, a description of the action proposed by the Service, and Form 12153 (Request for a Collection Due Process Hearing). This one is vital and should be responded to as soon as possible by contacting a licensed tax attorney.
If the taxpayer timely requests a CDP hearing, Appeals considers the case and makes a written determination about the appropriateness of the notice of lien filing, as well as the other issues raised by the taxpayer during the hearing. He may seek judicial review of Appeals’ written determination. Within 30 days of the date of the Notice of Determination issued by Appeals in a CDP hearing, the taxpayer may appeal the determination to the Tax Court. No collection action takes place during this period. Taxpayers who file CDP hearing requests outside the 30 day window will be granted an equivalent hearing before Appeals. Appeals will issue a Decision Letter, reporting its findings. Taxpayers cannot obtain judicial review of the Appeals Officer’s findings in equivalent hearings, nor does it stall the collection action.
If the Service Center notices do not result in payment or some taxpayer contact, the matter is referred either to the Automated Collection Service (ACS) or, if the balance exceeds $100,000, to a Revenue Officer. ACS or the Revenue Officer tries to establish levy sources to the extent they are not already in the computer and to make contact with the taxpayer to arrange payment. While the account is under the auspices of the Service Center or ACS, the collection personnel assigned to handle walk-ins at the Service’s local offices can also work on the matter.
Except with respect to “guaranteed or streamlined installment agreements,” any request a taxpayer makes to the Service to “give the taxpayer a break” from the full and immediate payment requirement starts with filing a CIS. Most often, Form 433-A (for individuals) or Form 433-B (for businesses) will be used. If the taxpayer has cash equal to, or in excess of, the tax liability, the Service will generally demand immediate payment. Assets are reviewed to identify those that may be pledged or readily converted to cash (e.g., stocks, bonds, the loan value of life insurance, equity in real estate). For example, if the taxpayer has net equity in his home, the IRS will expect him to mortgage the home and use the proceeds to pay the tax delinquency. If the taxpayer has available credit on a bank charge card or other possible source, the collection employee may require him to draw on the full cash credit line and pay the proceeds to the Service. If the taxpayer may be in that situation, consider going to the lending source first. Because the taxpayer’s credit rating may be poor at this time, a bank would likely deny a loan. The denial will end this area of discussion with the Service employee.
After reviewing the assets and liabilities section of the CIS and determining that the taxpayer cannot liquidate the debt by selling the assets or borrowing against them, the Service employee will review the income and expenses. The taxpayer’s ability to pay is determined by the excess of monthly income over allowable expenses-somewhat imprecisely termed “future income.” Page 6 of the Form 433-A contains a monthly income and expense analysis. The Service uses information from the Bureau of Labor Statistics to establish allowable expenses for certain items like transportation, food, clothing, and housing. Even though the taxpayer’s actual expenses may be greater than the allowable amount, the Internal Revenue Manual forces IRS personnel to count the “Collection Financial Standards” as his or her expense.