Mail from the IRS—Understanding Your IRS Notices

If you are receiving IRS notices in the mail, then chances are that you owe them money. Once a taxpayer files a tax return that reflects a balance due and doesn’t immediately pay that balance off, then the IRS begins issuing a series of notices and letters regarding how much is due. These computer-generated letters not only become nagging, but they also create much stress and anxiety. For the IRS, the notices are an efficient way to collect on the delinquent past due tax debt. For taxpayers, the notices are a constant reminder of growing tax problems. Although stressful, addressing the IRS notices in a timely fashion most certainly manages the tax problems and prevents distress that almost always results once these notices are ignored. As a result, it’s important to under what each notice means and what action a taxpayer should take in response to each notice.

The first notice a taxpayer usually receives is the CP-14—a balance due notice informing the taxpayer of the total tax debt due, the amount of any withholdings, estimated tax payments, total payments and credits along with the added penalties and interest. This notice is issued by the IRS after a tax return is filed and processed by the IRS.  If there is a balance owed, the tax return is processed and the tax debt owed is assessed. Typically, once this is done, the taxpayer receives the first notice outlining the total debt owed to the IRS. The older the return, the longer is takes the IRS to process and assess the taxes.  The CP-14—or first notice—provides instructions for taxpayers that agree with the notice to full pay the balance owed.  If full payment is made by the due date outlined in the notice, then additional interest will not be charged.  If full payment cannot be made, then a resolution must be negotiated with the IRS by either contacting the IRS customer service line outlined in the letter or by retaining a qualified tax attorney who can resolve the matter on a taxpayer’s behalf.

If the balance due is not paid by the due date on the CP-14 notice, in approx. 5 weeks, the IRS will issue a second notice CP-501. The IRS issues this reminder notice of the balance due, and provides instructions to the taxpayer on how to pay the balance due. The CP-501 notice also informs the taxpayer that if the amount is not paid in full, the IRS can issue a Notice of Federal Tax Lien, interest will continue to increase and that penalties may apply. If the taxpayer does not respond to the CP-501 notice, the IRS will issue the CP-503 notice—another reminder notice regarding the debt owed to the IRS.

If the taxpayer has not full paid the balance due or has not made any payment arrangements, the IRS will issue a CP-504 via certified mail to the taxpayer. This notice is more aggressive than the reminder notices and it signifies that the taxpayer’s case is in collections. The CP-504 notice states that the IRS can issue a levy against a state tax refund and can also file a Federal Tax Lien if they have not done so already. Please note that a CP-504 can be issued after the Final Notice of Intent to Levy to remind the taxpayer he or she is subject to enforcement action.

If no response to the IRS, or no payment, the IRS will issue a LT-11 (or CP-1058, or CP-90), Notice of Intent to Levy and Right to a Hearing via certified mail. The IRS is ready to attach a levy to a taxpayer’s wages and/or bank accounts to collect the unpaid tax and can also file a Federal Tax Lien if they have not done so already. However, before the IRS can issue a levy, the taxpayer has a constitutional right to request a hearing. The response to a timely request for a Collection Due Process Hearing must be within 30-days of the notice. If the taxpayer files a request for an appeal, the IRS will not issue a levy on the specified tax periods during the appeal process. However, if the taxpayer does not file a request for a hearing, the IRS can issue a levy after 45 days of the date of the LT-11, CP-1058, or CP-90 notice.

If the taxpayer receives social security benefits, the IRS will issue a CP-91 which notifies the taxpayer that the IRS intends to levy 15% of their social security benefits to pay for the unpaid taxes. The taxpayer has a right to file an appeal request, however, the appeal may not stop the garnishment against the social security benefits. Generally, if a taxpayer wants the IRS to release the levy against his or her social security benefits, the taxpayer would have to disclose their financial information to show financial hardship. Otherwise, the taxpayer would have to resolve their account via an offer in compromise or an installment agreement.

If the taxpayer had an installment agreement, but the taxpayer missed an installment payment, or incurred a new tax liability, or did not timely file a tax return, the installment agreement will default. If the agreement is going to default, the IRS will issue a CP-523 Intent to Levy, Intent to Terminate the Installment Agreement. Generally, the taxpayer has 30-days to respond to the notice before any action is taken by the IRS. Please note that the IRS cannot levy on a tax period without first issuing the LT-11, CP-90, or CP-1058 Final Notice of Intent to Levy. However, the LT-11, CP-90, and CP-1058 notices only have to be issued once on a specific tax period before that tax period is subject to levy.

The typical order for IRS collection notices is as follows:

  • CP-14 Balance Due Notice
  • CP-501 Reminder Notice of Balance Due
  • CP-503 Reminder Notice of Balance Due
  • CP-504 Intent to Levy Notice
  • LT-11, CP-90, CP-1058 Final Notice of Intent to Levy Notice
  • CP-504 Intent to Levy Notice **CP-504 can be issued after the Final Notice of Intent to Levy to remind the taxpayer he or she is subject to enforcement action**

By understanding the order of these notices and the consequences associated with each, a taxpayer will be better prepared to manage the tax issues. Waiting too long only makes matters worse since it’s easier to prevent a levy than to release a levy once it attaches to your bank account or income sources.  Seeking the assistance of a trusted tax attorney only further helps a taxpayer strategically resolve the tax liabilities moving forward.

Helpful Q and A libraries:

https://klasing-associates.com/topics/tax-relief-and-resolution/

https://klasing-associates.com/topics/innocent-spouse-relief-faq/

https://klasing-associates.com/topics/liens-levys-garnishments/

https://klasing-associates.com/topics/offer-in-compromise-faq/