When you receive an IRS collection notice, the first thing that happens may well be a knot in your stomach, or you can’t sleep at night, constantly worrying that the IRS will show up at your doorstep or worse even seize your assets. The next thing you should do is work with a representative to deal with it right away. Why? Because failing to respond can lead to some pretty serious consequences. Here’s an overview of what happens when you don’t respond to the IRS right away.
Step #1: Your account becomes delinquent
When the IRS sends a bill and the taxpayer doesn’t respond, the account becomes delinquent. Small, simple tax debts may be turned over to the IRS’s Automated Collections System. ACS representatives may attempt to contact the taxpayer by phone or in person to work out a payment solution. Keep in mind that ACS agents are trained to set payment plans. They cannot negotiate settlements and aren’t well trained in tax law. If the tax debt is not small, simple, or it involves payroll taxes, then it is assigned to a Revenue Officer.
Step #2: Notice of Federal tax lien
Even if you’re able to work out a payment arrangement with the IRS, the IRS may still file a Federal Tax Lien. The lien is a public notice to your creditors, and it is filed with a county government where you live, conduct business, or own property. It notifies the general public and your creditors that you have an unpaid tax debt and affects all current and future rights to property. Not only is a lien a matter of public record, but it also appears on your credit report and may harm your credit rating. If you try to sell property while a lien is in effect, the IRS has first dibs on the sales proceeds. A lien can also make it difficult to refinance a mortgage. Once the lien is filed, the IRS generally won’t release it until your balance, including penalties and interest, are paid in full.
Step #3: Opportunity to request a hearing
After the IRS files a lien and before they begin initiating levy action, you have a chance to request a hearing with the Office of Appeals. A Final Notice of Intent to Levy and Notice of Your Right to a Hearing may be personally delivered, left at your last known address, or sent by registered or certified mail. You can request the hearing by filing Form 12153, Request for a Collection Due Process or Equivalent Hearing. This form requires you to provide information about yourself and the reasons you believe the IRS should not pursue the lien or levy against you. If you do not complete the form correctly, the IRS will reject it. You have only 30 days from the date of that notice to request an appeals hearing. The 30-day window is a very strict deadline. If you file within 30 days, the IRS must stop collections on the debt amount pending the outcome of the hearing. If you do not file within that time frame, you lose the right to a Collection Due Process (CDP) Hearing. You can still file for an Equivalency Hearing, but the IRS can proceed with collection action while you wait.
Step #4: Enforced collection action
If you don’t attempt to work out a payment solution or you miss the 30-day window to request a hearing, the IRS will begin enforced collection action. This includes levying your income or assets such as bank accounts. In some cases, the IRS may even seize and sell your property. If you receive a Notice of Levy on your bank account, the IRS is trying to take money directly from your account. Once a levy is issued, the IRS can take as much money as you have in the account to satisfy the tax debt. You may not even realize it until the money is gone and you’re trying to purchase groceries, make your rent or mortgage payment, or when you hear from an employee that her paycheck bounced. Levy of assets isn’t limited to bank accounts. Personal property and real estate, vehicles, boats, wages, retirement accounts, tax refunds, and rental income are potentially subject to seizure by the IRS. First, a revenue officer will seize any assets located in public areas. If that isn’t enough, they will request to enter your home or place of business. If you consent, the revenue officer will enter your home or place of business and seize personal property such as jewelry, artwork, furniture, equipment, or other assets there. Once the IRS places a levy on wages, your tax refund, or other income, the levy will remain until the IRS releases the levy, you pay your tax debt in full, or the statute of limitations expires.
Step #5: Passport restriction
If you owe more than $50,000 in unpaid taxes, penalties, and interest and the IRS considers your tax debt to be “seriously delinquent,” your ability to travel may be affected. The IRS can notify the State Department that will, in turn, deny, revoke, or limit the use of your passport until you get in good standing with the IRS, either by paying the tax bill in full or setting up an installment agreement. If your passport is revoked, there is no quick fix. Even if you pay the balance in full, the IRS has 30 days to send a decertification notice to the State Department. If you believe the amount the IRS is trying to collect is incorrect or you were erroneously placed on the list, you can appeal the status in federal district court or U.S. Tax Court, but your passport will remain restricted while you appeal. The good news is that you have the right to have a tax professional represent you in front of the IRS and guide you through the collection process while advocating on your behalf. Contact a licensed professional as soon as you receive any sort of collection letter from the IRS to get help creating an effective plan of action. It’s normal to fear the IRS and its power, but the ultimate way to stand up to it is to get help from someone educated about its procedures and abilities before things escalate.