The IRS Contacted Me About Unpaid Taxes – Now What?

With the recent increase in agency funding under the Inflation Reduction Act, the IRS has been making concerted efforts to collect unpaid taxes (and related interest and penalties) from taxpayers. In fall of 2023, the IRS announced that it would be focusing collection efforts to pursue high-wealth individuals who have over $1 million in income and a tax debt of $250,000 or more. In July 2024, the IRS announced that over $1 billion had been collected through this initiative. As a result of these increased collection efforts, impacted taxpayers may find themselves asking: What do I do now? Timely response via one of the below actions may reduce a taxpayer’s exposure to interest and penalties. 

The Collection Process

To begin the collection process, the IRS will contact a taxpayer through a series of written correspondences mailed to their address. The first two notices (CP501 and CP504) notify the taxpayer of the balance due, including an explanation of any interest and penalties. If the taxpayer does not respond to these notices, the IRS may continue collection efforts through the use of liens, levies, and passport restrictions.

Taxpayers’ Options to Avoid the Escalation of Collections

Taxpayers can take action to avoid escalation of the collections process. The following actions may be available to a taxpayer to resolve any unpaid taxes:

Full payment: Taxpayers can make a full payment of the outstanding debt via check or online at irs.gov via DirectPay.

Extension of time to pay: Taxpayers who are able to fully pay their tax debt (including interest and penalties) within six months may call the IRS to request a 180-day extension of time to pay.

Request for Currently Not Collectible Status – Taxpayers may request the IRS designate their account to be in a currently not collectible status (“CNC”). Taxpayers must show that payment of the tax debt would prevent the taxpayer from meeting basic living expenses. Taxpayers will need to complete Form 433-F, along with relevant financial substantiation. The IRS may annually request the taxpayer to provide updated financial information to confirm that their ability to pay has not changed. CNC does not erase the debt owed, and interest and penalties will continue to accrue. 

Requesting Payment Plans and Offers in Compromise

In addition to the above steps, there are two other, more complicated options that taxpayers may wish to use.

Payment Plan

Taxpayers who require more than 180 days to fully pay their tax debt may request an installment agreement that enables them to pay the total amount owed within an extended time frame. Interest and penalties continue to be charged until the tax debt is completely paid. If the IRS agrees to a payment plan, any subsequent failure by the taxpayer to make an installment under the plan, or late payment of tax on a future tax year, is considered a default and the entire payment plan is cancelled. 

A taxpayer may request a payment plan using the following methods:

• Online at irs.gov/OPA. Taxpayers that meet eligibility criteria to apply online do not need to disclose financial information and will be immediately notified of whether the application was accepted. Individual taxpayers with an outstanding tax liability of $10,000 or less (not including interest and penalties) which can be paid within three years may request a guaranteed installment agreement. Taxpayers with an outstanding tax liability, including interest and penalties, of $50,000 or less (for individuals) or $25,000 or less (for businesses) who can make full payment within six years can request a streamlined installment agreement.
• By phone call to the phone number on your IRS bill. Prior to calling, Taxpayers should have completed Form 433-F (Collection Information Statement). In certain situations, the IRS may request taxpayers complete Form 433-A for wage earners and self-employed individuals or Form 433-B for businesses. The collection information statement requires disclosure of a taxpayer’s assets, income, and expenses (along with relevant substantiation). Based on this information, the IRS will calculate a taxpayer’s available income to pay the outstanding tax debt and calculate a payment plan accordingly.
• In person at a local IRS office.
• Via mail with the submission of Form 9465 (Installment Agreement Request), accompanied by Form 433-F (Collection Information Statement).

Offer in Compromise 

Taxpayers may request to settle unpaid taxes for less than the full amount considered owed. The IRS may agree to the request where:

1. the calculation of the tax debt may not be accurate,
2. the taxpayer has insufficient assets and income to pay the amount due, or
3. due to exceptional circumstances, paying would cause the taxpayer an unjust economic hardship.

To request an Offer in Compromise, taxpayers must submit:

• Form 656-L (Offer in Compromise – Doubt as to Liability) where there is a genuine dispute under tax law as to the amount due, or Form 656 (Offer in Compromise) where the taxpayer is unable to pay or there are exceptional circumstances;
• Form 433-A (OIC) (Collection Information Statement for Wage Earners and Self-Employed Individuals) or Form 433-B (OIC) (Collection Information Statement for Businesses) and relevant financial substantiation;
• Payment of the application fee; and
• Initial payment under the offer in compromise (20% of the lump sum offer or the first month of a periodic payment offer).

Collection Activities

Taxpayers receiving initial correspondence from the IRS regarding unpaid taxes who do not take one of the above referenced actions may face collection efforts, such as liens, levies, and passport restrictions.

A lien gives the IRS legal claim that attaches to a taxpayer’s current and future property (such as home and car). The IRS files a Notice of Federal Tax Lien with local or state authorities that can be viewed publicly by employers, landlords, and others. A lien does not mean the IRS has seized a taxpayer’s property.

A levy is a legal seizure of property or rights to property to satisfy a tax debt. The IRS may seize tangible property, which will be sold to help pay the tax debt, or wages and bank accounts, where the money will be applied to the tax debt.

A U.S. passport will not be issued or renewed to any individual who has been certified by the IRS has having a seriously delinquent tax debt. The Department of State may also revoke a previously issued passport.

There are many moving parts to the IRS’ collection efforts, and a misstep could result in an unnecessary lien or levy. Taxpayers who are contacted by the IRS regarding an unpaid tax who are unable to fully pay should engage a trusted tax advisor to help them navigate through the collection process.

In this issue:

• The IRS Contacted Me About Unpaid Taxes – Now What?
• Failure to File Forms 1099 Correctly Can Result in Hefty Penalties
• False Start: Why Newly Formed Online Businesses Should be Cautious When Deducting Business Expenses
• Are You a “Real Estate Professional?”