The IRS has procedures in place that guide how the IRS goes about collecting a debt owed by a taxpayer. The IRS collects debt from taxpayers through both involuntary means, like levies on income and assets, and voluntary means like an installment agreement. As you can imagine, the sheer number of taxpayers and the amount of dollars that the IRS deals with in collections adds up to very big numbers. That large volume, produces a large and cumbersome system used by the IRS to administer its effort to collect delinquent taxes. The detail of IRS collection procedure is set out in Part 5 of the Internal Revenue Manual.
This is a slight oversimplification, but IRS debts accrue in one of three ways: 1. when the taxpayer files a tax return self-assessing taxes which are not paid in full; 2. when the IRS makes an assessment of tax following an audit (this can happen for multiple reasons); and 3. when the IRS the assesses penalties. An assessment is nothing more than the IRS recording the amount of tax owing in its official records. Once an assessment is complete, it is considered a legally owing debt along with all applicable penalties and interest. It is called a Taxpayer Delinquent Account (TDA) when a taxpayer has an unpaid assessment. The IRS will begin its effort to collect a debt as soon as the assessment “posts” to a taxpayer’s account. The IRS will continue its effort to collect on TDAs until the debt is paid in full, or the time it is legally allowed to collect lapses or expires.
The IRS initiates the collection process by sending notices of a tax debt to the taxpayer. Two rather benign notices are usually sent before the IRS takes any serious action. The notices rapidly escalate in seriousness culminating with the Final Notice of Intent to Levy. This notice will advise the taxpayer of the IRS’s intent to levy income and/or assets, and of the taxpayer’s right to a collection due process hearing which is a form of administrative appeal. The taxpayer generally remains in “notice status” until the due date of Final Notice expires. While the taxpayer is in notice status, the IRS is not doing much more than sending the taxpayer notices which say “you owe a debt, please pay.” Although, the IRS may file a lien to secure the debt during this stage. If the tax debt goes unresolved, the case will be sent either to the Automated Collection System (ACS) or it will be assigned to the Collection Field Function (CFF).
The goal ACS and the CFF is simple: collect taxes.
ACS consists of a large computerized inventory management system and call centers staffed by Customer Service Representatives, aka Collection Representatives. ACS sends a massive volume of automated letters on TDAs everyday. Collection Representatives working in the call centers field incoming telephone calls from taxpayers and review documents provided by taxpayers. The prolonged underfunding of the IRS has significantly hampered the service taxpayers receive to the point where the IRS answers a smaller and smaller percentage of incoming calls and there are significant delays in reviewing documents. Some of my observations on the issue of IRS underfunding can be found here. Nevertheless, it is important to stay engaged with ACS to address a tax debt.
The IRS, through ACS, will search its massive volume of internal records for levy sources and begin levying on a taxpayer’s income and assets. This is actually very easy for the IRS because employers report W-2 wages to the IRS; businesses report 1099 income of their independent contractors; banks report interest income via 1099s, etc. The IRS is in possession of a lot of taxpayer information that it uses to aid in collection of a debt. The most common asset levied is money in a bank account. The IRS frequently garnishes wages. The IRS will also employ the Treasury Offset Program to capture refunds and apply them to the debt. These are all easy targets for the IRS. IRS Collection Representatives working in ACS do not reach out to taxpayers to discuss the best way to resolve a tax debt, so the burden is on the taxpayer to communicate with the IRS and initiate a resolution. Otherwise, IRS levies and liens are inevitable.
The CFF is far more proactive in chasing taxpayers down to collect a debt (and they are very good at it). The IRS CFF will assign a Revenue Officer who is an IRS employee generally working in close proximity to where the taxpayer lives. The Revenue Officer is tasked with investigating a taxpayer’s collection potential and collecting the outstanding debt. Revenue Officers do make contact with taxpayers and are even known for occasionally showing up unannounced at a taxpayer’s business to ask questions or nose around a bit to identify visible assets, or find clues about income sources and assets. Cases assigned to a Revenue Officer are usually higher dollar cases.
Taxpayers do have rights which are outlined in IRS Publications 1 and 594. It is always best to avoid enforced collections. It is incumbent on the taxpayer to be proactive and address issues promptly. Procrastination is a killer when it comes to taxes. There are multiple channels available for taxpayers to address a tax delinquency with the IRS, which include: 1. Calling the service center or Revenue Officer; 2. Writing the Service Center or Revenue Officer; 3. Submitting an offer in compromise to COIC; and 4. Establishing a payment arrangement online if the total balance is not over a certain threshold.
There are several appeiral options available when a taxpayer’s effort to resolve a tax debt with the IRS fails. The appeal options include the collection due process hearing, equivalent hearing, and collection appeal program.