Why is it important to avoid IRS Collection?

By Eric Wong, EA

When you file your federal tax return reporting a tax due, you are self assessing the tax that creates a tax liability on your IRS tax account for that tax year. In other words, you have self assessed your tax. That becomes the date of tax assessment and starts the 10 year period for the IRS to collect the tax from you for that tax year. The IRS collection period for any unpaid tax owed ends 10 years from the date of the self assessment.

You are required to full pay the reported tax by the return filing date generally April 15, not including a 6 month filing extension to October 15. The filing extension simply gives you more time to prepare and file the tax return, not give you more time to pay the tax reported.

To reduce the amount of tax payment, you should have paid estimated taxes, at least 90% of the current year tax, or 100% of the prior years tax owed, whichever is smaller. If you do not timely pay the tax owed by the return filing date, you will be assessed a late payment penalty of 5% of the unpaid tax each month, up to the maximum 25%. The unpaid balance is also subject to interest that compounds daily. So its best to pay the tax as soon as possible to minimize the penalty and interest charges from accruing.

You will generally receive two billing notices for the tax due. Do not ignore the notices! The IRS will not just go away.

If you can’t full pay, you should pay whatever you can and voluntarily explore payment arrangements with IRS such as an installment agreement (IA) and offer-in-compromise (OIC). If you fail to respond to the billing notices or make voluntarily payment arrangements, the IRS could start the collection process against you.

Collection actions can range from freezing and applying any claimed state and Federal tax year refunds to the tax owed to seizing your property and assets such as homes, cars, and bank accounts and then sell it to satisfy the tax debt.

In addition, IRS may file a Notice of Federal Tax Lien in the public record to notify your creditors of your tax debt. A federal tax lien is a legal claim to your property, including property that you acquire after the lien arises. The federal tax lien is a “silent lien” because it arises automatically when the first notice and demand for payment of the tax assessed against you and you fail to pay the amount in full.

The filing of a Notice of Federal Tax Lien may affect your ability to obtain credit although it no longer appears on major credit reports. Once a lien arises, the IRS generally can’t release the lien until the tax, penalty, interest, and recording fees are paid in full or until the IRS may no longer legally collect the tax, i.e. when the 10 year collection period expires. The IRS releases your lien within 30 days after you have paid your tax debt.

In the past, there were unannounced visits from an IRS Revenue Officer (RO) to your home or business as part of their efforts to collect back taxes owed by taxpayers. On July 24, 2023, the IRS announced that most unannounced RO visits to taxpayers would stop to reduce public confusion and enhance overall safety for both taxpayers and IRS employees. Instead, the RO will now send a Letter 725-B, Meeting with Taxpayer – Confirmation, to schedule a meeting. If you receive this letter, you will be able to schedule a face-to-face meeting at a set place and time to resolve your case more quickly and hopefully eliminate the need for multiple meetings with the RO.

Revenue officers are IRS civil enforcement employees who work cases that involve tax debts owed by a taxpayer or delinquent tax returns. Their role involves investigation, and if necessary, appropriate enforcement action against you.

The big take away here is that you should not let things get to this point in the first place and then deal with Collection. A proactive approach should be taken here because the costs for not doing so are likely to be higher for you.

With the recent downsizing of the IRS workforce and increased use of automation for its collection efforts, it will be more difficult for you to deal with the IRS.

If you have a tax issue, please contact the undersigned Eric Wong, EA for a complimentary 30 minute consultation.