Exploring the IRS Collections ‘Mystery’

IRS Collections is an enigma and a different kind of animal from the rest of the IRS.  There are hard and fast deadlines that must be met or the taxpayer can lose their rights. 

What typically happens is that you acquire a collections client when these deadlines have passed. To protect the IRS’s interests they will typically file a tax lien against the taxpayer and that is when they will contact you.

Dissecting the Collections Process 

Depending on the situation, with a lien the IRS can take a number of collection actions. However there are ways to stop these actions. The actions they can take is garnishing wages, garnishing accounts receivable, levying bank accounts, putting a lien on a house and in certain states they can even seize the house. 

However, there are many ways to stop these actions. A majority of collections are handled through Automated Collections System or ACS, an automated system that works in 30-day increments. 

For example, when a tax is assessed the IRS will send a first letter stating the amount owed. Here’s what happens next:

• If the taxpayer does nothing, the IRS will send a second more threatening letter.
• If the taxpayer does nothing, the IRS will send an Intent to Levy a taxpayer’s state refund, this letter may come certified. 
• If the taxpayer continues to do nothing, the IRS will send an Intent to Levy this will come Certified Mail.
• If the taxpayer still does nothing, the IRS will send a Final Intent to Levy, and this too will come Certified Mail. 
• If the taxpayer does nothing again, they lose a lot of rights and the case, depending on how much is owed, will either go to ACS, or to the field to be worked on by a Revenue Officer or RO. 
• Further depending on the amount owed the IRS will file a lien against the taxpayer or they will just keep sending letters.

Interestingly enough during this process you will have a different reaction from some taxpayers.  About 20 percent of taxpayers will act immediately with the first letter. 

They will take the first step and either pay the amount, or if they can’t afford it, they will contact the tax preparer that did the tax return unless they did it themselves. We all know that you don’t have to have a license to prepare a tax return. 

In fact, anyone can prepare a tax return with a PTIN. The tax preparer that just has a PTIN may be competent, however most are not competent about collections. Most know about Installment Agreements or IAs, however they may not know the ins and outs of them. 

If the taxpayer cannot afford an IA the unlicensed tax preparer may or may not know what else to do.  Nevertheless, they can’t represent the client anyway. A licensed tax professional can represent however as I stated collections is a different animal and they may have a working knowledge of how it works, however they don’t know the ins and the outs of what happens if they do something.

Then, a majority of the taxpayers will ignore these letters until the certified letters come. Interestingly enough, a small minority will either contact someone or call the IRS themselves.

However, most will just ignore it. Then they will get to ACS and if ACS does nothing but send letters, the taxpayer will do nothing and a lien will eventually be filed.

After the Letters Come

When a lien is filed the taxpayer will be bombarded with phone calls, letters and sometimes text messages from tax resolution mills. These calls are made by salespeople that have a working knowledge of how collections work but not the ins and outs. They work on commission, and will sell something to the taxpayer that costs the most.

There are various ways to resolve a collections issue, however they all have certain consequences.  When a tax is assessed the IRS has ten years to collect the debt or the Statute of Limitation (SOL). After the SOL has come and gone the debt falls off the radar and the IRS can do nothing.  However the resolution to the case can toll the SOL. 

The fastest, easiest way to handle a collections issue is to file an IA. However, depending on the amount that is owed the taxpayer must disclose some financial information such as assets. 

If the taxpayer has assets like a house with enough equity to pay the debt the IA will be rejected. The reason is the taxpayer can get an equity loan to pay the debt. However, if there are extenuating circumstances, you can ask for a Collections Due Process Hearing or a Collections Due Process Hearing Equivalent (CDP) I will explain the difference later. 

If the IA is accepted the taxpayer will have to stay current on the installment payments or the IA will be dissolved. Further, they will have to file and pay the full amount of their taxes as the installment is in place or the IA will dissolve. The IA will toll the SOL by two years. Furthermore, depending on the amount owed a down payment based on a percentage of the amount owed will be required.

The OIC Route

Another way to resolve the collections issue is to file an Offer in Compromise (OIC). Under certain circumstances, the IRS can accept an offer for less than the amount owed. The amount they will accept is a mathematical equation based on current income, future income potential, assets, liabilities, and net worth.

These OICs are what the Tax Resolution mills push because they are the most expensive. Because of that, less than 10 percent of these OICs are accepted. In fact, the whole process can take up to a year to work through the system, and will go to a Resolution Officer in the field. 

Here is the problem:  Since less than 10 percent of these offers are accepted, if you don’t know what you are doing you can cause a mess for the taxpayer.  When filing an OIC you have to also file Form 433-A (OIC) with the actual OIC.  On this form you must disclose all assets with account numbers for financial institutions. You must disclose all other assets with account numbers, vehicle identifications, real estate with current appraisals, and other assets with any account numbers.

All assets have account numbers and you must disclose all liabilities the same way you disclosed the assets. Some liabilities such as credit card debt are not allowed to be taken into account. 

If self-employed, you must disclose accounts receivable. In addition you have to disclose income and expenses. With expenses, no matter how much they are the IRS has something called industry norms and will only allow those amounts.  If the OIC is rejected you can appeal it. If you don’t appeal it, or even if you do and the appeal is rejected, the taxpayer has a lien already. 

You have told the IRS where to get the assets and they will aggressively pursue them.  If the offer is accepted the taxpayer for the next five years must file their tax returns on time and pay the tax that is due on time or the offer is nullified. This should be used only as a last resort.

Exploring CNC Status

The final way to resolve a collections issue is with putting the taxpayer on the Currently Non-Collectible (CNC) Status. On CNC, the SOL keeps running and all collection measures will stop.  It is reviewed every two years to see if the taxpayer still qualifies.

If they do then there is no problem however, if they don’t, the collections efforts will begin again. To get on CNC you either write a letter or if in the field with an RO you call them. 

Sometimes they will ask for proof of no way to pay and other times they won’t. It’s truly a crap shoot and the CNC status does not toll the SOL.

In Part II we will go into great detail about what the IRS can do to collect if all of these ways to resolve the debt are rejected, or nothing is ever done.