IRS Tax Debt Collection In 7 Steps

This entry is part 2 of 2 in the series Tax Representation

IRS Tax Debt Collection

How does the Internal Revenue Service collect a tax debt? They usually follow seven separate steps, but it doesn’t begin until the IRS has made a tax “assessment.”  The Service must send you notification that there is an outstanding balance due. This surprise announcement of “tax debt” typically comes as IRS Form CP2000 or CP2501. This first step is critical in marking the start of the “collection process”.  If you receive a letter from the IRS or either of these forms shown below, it might be a good time to seek outside help from an experienced tax practitioner before you talk to any IRS representative. 

What is IRS Form CP2000 or CP2501?

A CP2000 or CP2501 are computer-generated documents that propose some clarification or more tax. The CP stands for “computer paragraph”.  A computer program called the Automated Under Reporter (AUR) creates these documents. The CP2000 has a brief explanation why the IRS believes you owe them money and a deadline date for your response. The CP2501 does not show a proposed tax assessment but rather describes some differences between what you have reported on your tax return and other information sources available to the IRS. Both notices ask you for clarification. It is critical you understand that these notices are proposals of some discrepancy or needed change; they are NOT demanding payment.

You can either offer a written explanation that clarifies the situation or accept the new assessment and pay the tax, any penalties, and interest due.  If you disagree with the proposed assessment, a short explanation with all supporting documents will often resolve the matter.  If you have forgotten to report more income, a prompt response in the form of payment and any accrued interest will resolve your IRS problem.

Responding to a “CP”-notice

Before you automatically pay any fines to your payment, consider asking the IRS for a First Time Abatement (FTA) of any penalties associated with the tax assessment. Depending on your habits filing prior year tax returns and paying any outstanding liabilities, the extra fines may be waived.  You must, however, ask for an FTA. The IRS does not automatically grant them to you.

Consider a paper check or money order as a better method of payment here than a separate credit/debit card (or http://www.pay.gov) charge because it remains with the paperwork!

If you have received a CP2000, write the AUR control number (in the upper right corner of the first page of the document) on all correspondence or payments. Send your response, especially if it includes payment, as US Postal Certified Mail. Make certain your Social Security number is on every page and in the memo section on your personal check or money order. Also included the tax year referred to in the upper right corner of the CP2000 on any payment.

Seven Steps in the Collection Process

Tax reporting begins with the IRS Form 1040. The collection process typically proceeds as follows:

  1. You either pay the tax balance due or give an explanation and proof why you believe the assessment is incorrect.
  2. The IRS notifies you of the tax assessment, accruing interest, and penalties.
  3. The IRS “attaches” a statutory or “silent” Federal Tax Lien to your property.
  4. The IRS tells you they demand payment of the debt.
  5. You have many opportunities to comply throughout the tax collection process.
  6. The IRS sends you a Notice of Federal Tax Lien.
  7. The IRS begins enforced collection (levy or seizure) of property to collect your tax debt.

Best Practices

I strongly discourage you to solve your debt issue on your own by contacting the IRS on your own.  Seek a skilled tax preparer like an IRS Enrolled Agent, Certified Public Accountant, or tax attorney.  You are best served by finding a tax practitioner who specializes in enforced collections like garnishment, liens, levies, and seizures and who can represent you during any IRS Collection or Appeals process.

Additional Information You Can Use

IRS letters scare most ordinary taxpayers.  Many things can happen if you don’t respond quickly to any IRS correspondence requesting either more information, clarification, or payment.  If you ignore a CP2000 or CP2501, the Service will try to the next step in the process.  Each extra step is more severe and could lead to more aggressive forms of debt collection.   An IRS tax debt issue will not disappear without some meaningful response from you.

Know what you don’t know

If you ignore the IRS collection notices and reminders, the Service has the legal authority to resort to more drastic measures to collect taxes you owe. What are IRS enforceable collection methods?  What is a “silent” Federal Tax Lien?  How does a tax lien differ from a tax levy?  Have you heard stories about the Federal seizure of personal property?  Do you want to know what to do if the IRS assesses new taxes?  Please type your email in the box below so I can send you a specially prepared White Paper entitled “What You Need to Know About Your Tax Debt“.

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Consult a qualified tax preparer.