The IRS Collection Process: Steps to Handle Delinquent Tax Return

The Internal Revenue Service (IRS) follows a systematic approach to address tax delinquencies, ensuring fair and transparent treatment of individuals and businesses. Understanding the process and steps involved can help you manage your tax situation more effectively. This guide aims to provide insights into the various stages of the IRS collection process.

Initial Contact: Letters and Requests

The collection process typically begins with the IRS sending a letter to the individual or business in question. These letters serve as the formal notification of the owed tax debt and outline the specific circumstances and requirements for payment. For example, the IRS may request specific years of returns that it does not have on file or indicate that the individual owes additional taxes that they have not yet paid.

It is crucial to respond to these initial letters in a timely manner. If you do not respond, the IRS may send follow-up letters, each one escalating the situation. Eventually, you may receive a subpoena requiring you to appear either in court or at an IRS audit. Remember, the IRS will never call you by phone to request information or demand payment; all contact must be in writing unless you initiate the call.

Establishing the Debt

The first step for the IRS in the collection process is to establish the debt. Each year is considered independently, and factors such as the filing status, statutes of limitation, and other legal considerations determine how the IRS will proceed. The agency will send you a series of letters, attempting to get you to pay the debt. You may also have the opportunity to enter into an agreement to pay before or after the involvement of the Collections department.

It's important to note that an agreement with the IRS can only be entertained if you are in full compliance. This means that all required years of returns must be filed and assessed. Until you meet this requirement, the IRS is unlikely to consider any payment plan or agreement.

Engaging the Collections Department

If you fail to respond to the initial letters or attempts to establish the debt, the Collections department will become involved. The Collections department will send a series of letters demanding that you address the debt. If you do not respond, they may take more aggressive actions, such as issuing liens and levies, which can have severe financial and legal consequences.

For instance, take the case of two clients of mine:

Client A: Owes $600,000. The IRS is not taking any action because they plan to let the statutes of limitation expire. They have determined that this individual is non-collectible, even though they work and have assets. Client B: Owes $1,900 from 2017 and is being very aggressive to collect.

This example illustrates the variability in the IRS collection process depending on the individual's financial situation, compliance, and the nature of the debt.

Lessons and Recommendations

The lessons from these cases are clear: do not be fooled into thinking that the IRS will take no action if you owe a small amount. On the other hand, if the debt is substantial, the IRS may believe that the individual is non-collectible.

To avoid potential complications and ensure a smoother process, here are some recommendations:

Respond to all IRS letters promptly and diligently. Keep detailed records of your tax-related activities and any communications with the IRS. Consider seeking professional assistance from a tax attorney or a certified tax advisor if you believe you are being treated unfairly or if you are facing serious financial difficulties. Understand your rights and obligations as a taxpayer and know that the tax law is complex; be informed and proactive in managing your tax affairs.

By taking these steps, you can navigate the IRS collection process more effectively and protect yourself from potential legal and financial repercussions.