What is the IRS collections process?
When the IRS sends you to collections, it means you have overdue taxes you still haven’t paid after sending you a bill, and they’re now taking active steps to collect the money you owe, including any penalties and interest.
The IRS will either try to recover the money themselves, or in limited circumstances, assign private contractors to collect on the government’s behalf. A private firm is only used for certain accounts where IRS has exhausted all measures to collect. If a private firm is used, the IRS will notify you beforehand, and provide security information so that you can identify the private collector as legitimate.
The IRS collections process, step-by-step
Publication 594 is a detailed description of the IRS collection process. Here are steps you can expect if you are sent to collections:
- Your tax return is filed and your tax liability is assessed.
- The IRS sends you a tax bill, including taxes you owe, together with penalties and interest if applicable. Your bill will detail payment options and the due date.
- If you don’t pay the bill or get in touch with the IRS, they’ll send you a final bill.
- If you ignore the final bill, the IRS collections will begin taking action to recover their money.
There are several collections actions the IRS can take:
Offsetting future refunds. The IRS can apply tax refunds in subsequent years against overdue taxes and assessed penalties and interest.
Federal tax lien. A legal claim against your current and future property automatically comes into effect if you don’t settle your debt after receiving your first bill.
Notice of federal tax lien.This is a public notice to let creditors know there’s a claim against your assets.
Seizure/levy. You’ll receive a Notice of Intent to Levy or Notice of Your Rights to a Hearing if your tax debt remains outstanding despite the bills sent to you. Then your assets will be seized and sold, with proceeds applied to offset your tax debt. Examples of assets that can be levied include your wages, bank accounts, retirement account, house, and car.
Effects on passport. If your tax debt is considered seriously delinquent, you will not be issued a passport or it won’t be renewed, and your current passport could be revoked.
How to avoid IRS collections
It’s important to remember that the goal of the IRS is to work with taxpayers to resolve their tax debt before taking collections actions —and a big part of this is about communication.
If you disagree with the tax bill, let the IRS know by calling the number on the bill or by talking to your local IRS office. Of course, authorizing an expert like a Jackson Hewitt Tax Pro to talk to the IRS on your behalf can help too. The IRS can revise your bill if they agree that their initial assessment is incorrect.
Even if you are unable to pay in full immediately, there are still steps you can take to avoid collections. For example, you can apply for an Installment Agreement, which will allow you to pay smaller regular amounts over time. Applications can be made online, by phone, mail, or in person.
Where you’re unable to afford a full payment or installment payments, you can make a request for an Offer in Compromise to settle less than the full amount owing. IRS will consider your request, factoring in whether your tax debt is accurate, if you have sufficient income and assets to settle the debt, and if payment would cause you economic hardship.
What if you don’t file your taxes to avoid collections?
Some taxpayers try to avoid collections by not filing their tax return. However, when you fail to submit a return, the IRS can file a Substitute for Return (SFR) on your behalf to approximate the tax you owe. They use information from past returns as well as income reported by your employer to estimate your taxes, then bill you according to this estimate. It’s worth noting the tax assessed on SFRs is often higher because the IRS won’t apply deductions, credits or adjustments you qualify for.
Clearly, the consequences of being sent to IRS collections are serious. If you need any advice on your tax debt or tax return, Jackson Hewitt can help. Our trusted Tax Pros can negotiate with the IRS on your behalf and help you get back on track. So book your appointment today!