How Does Collections Work for the IRS?
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Snakes and spiders; heights and dark water; taxes and collections: there are some things in life that should never go together. When they combine, they create that moment when you think nightmares can’t get any worse, but then they do.
Taxes can be terrifying by themselves, but when you combine the Internal Revenue Service (IRS) with the IRS Collections office, you get a full fledged horror story! If this ever happens to you, what are you supposed to do to make the nightmare end?
Luckily for you, Fiscal Tiger is here to help ease some of that stress. The IRS can certainly be ruthless, but only when you owe them money. If you have been sent a collections notice, use this knowledge to learn how to navigate those situations, discover who to contact, and find ways to pay what you owe.
IRS Collections Procedure
Let’s start by looking how a collections process works with the IRS, step-by-step.
Typically this process will start immediately after tax season. If for some reason you did not pay the full amount owed to the IRS, you will receive a letter in the mail that is labeled a CP-14, which is a bill for the amount owed. This letter begins the collection process for taxpayers. Along with this bill will be sent a notice of rights as well as a pamphlet titled, “Understanding the Collection Process.”
Not all taxpayers will be able to pay this bill immediately, and some may question its accuracy or even legitimacy. If this happens, the IRS suggests contacting them immediately. Their options include:
- Call the phone number on the bill or 1-800-829-1040.
- Write to the office that sent the bill at the address on the bill.
- Visit the nearest IRS office.
Additionally, there are a handful of options for those that cannot afford to pay the IRS’s bill. This includes extending or postponing the payment until a later date (when it can be paid in full), signing onto an installation agreement, or an offer of compromise between the IRS and the taxpayer.
Unfortunately, at any time during that collection process — even if a repayment agreement is met — the IRS can create a tax lien on the taxpayer’s property to ensure payment for the bill. This can happen within ten service days (not counting holidays or weekends) following the initial outreach through a CP-14. Additionally, the IRS notes: “The unpaid balance is subject to interest that compounds daily and a monthly late payment penalty.”
After the initial billing notice, if the taxpayer does not respond to the IRS, their account will become delinquent. When this happens, the account can be turned over to the Automated Collection System (ACS). When this happens, the ACS will attempt to contact the taxpayer over the phone or in person to work out a repayment plan (note: the IRS will never contact you by email, text message, or any social media channel; these are all common scams and should be reported immediately if you see them — more on this below). If further contact cannot be made, the IRS and ACS may forcibly take possession of property or wages to get the money back that is owed to them.
Throughout this entire process, taxpayers are encouraged to pay what they can as soon as they can, and are given the option for appeal (if necessary). The IRS might be ruthless, but there are plenty of legal protections afforded to the taxpayer that can help them navigate the collection proceedings.
Paying the IRS
The IRS offers a few options for payment, but one of the biggest questions is how should you pay them? If you can’t afford cash outright, what other methods of payment do they accept?
Surprisingly, the IRS suggests taking out a cash advance on credit cards, completing a bank or even a payday loan to repay the delinquent account. This is because the late fee on the IRS’s bill will be much higher than any interest accrued on loans or credit cards. Plus — because you will be taking care of the problem in a timely manner to avoid fees — it could offer you the opportunity to prevent a tax lien being taken out on your property (and thus your credit report).
Additionally, if your credit score is too low for a cash advance or loan, you have the option of selling some of your property to pay back the IRS. This includes land, homes, cars, or other large and expensive items that you own.
If you are still unable to pay back the IRS, they recommend asking for a postponement to delay the collection. According to the IRS’s statement: “If you need more time to pay, you may ask that we delay collection and report your account as currently not collectible. If the IRS determines that you can’t pay any of your tax debt due to a financial hardship, the IRS may temporarily delay collection by reporting your account as currently not collectible until your financial condition improves. […] If we do delay collecting from you, your debt continues to accrue penalties and interest until the debt is paid in full.”
Unfortunately, not all collection calls from the IRS are legitimate. There is always a chance that a scam is in the works, and there are some tell-tail signs you should consider.
First, the IRS will always notify you by mail before resorting to in-person contact or phone calls. They will never simply show up or call you without prior notification.
Secondly, the IRS will always accept multiple forms of payment. Scammers often request very specific forms of payment: such as gift cards, prepaid debit cards, or wire transfers. This is common with most collection scams, not just those that are pretending to be with the IRS.
Third, scammers will demand payment without offering you the ability to ask questions or appeal the decision. This would never happen with the real IRS. Since the IRS is a government entity, and your rights as a taxpayer are of the utmost importance, the IRS will never deny your ability to appeal.
Lastly, the IRS would never threaten to bring in the police or local law enforcement. Scammers will do this to entice you to pay them as soon as possible. Additionally, scammers might threaten taking away someone’s driver’s license, business license, or even their green card or immigration status. The IRS has no authority to commit those actions, but they are common scare tactics of scam artists.
Scammers are always looking for new ways to get money, so it’s important to stay vigilant and always ask questions if you find yourself in a situation where you may be getting contacted by a scammer. You can also stay up-to-date on the latest scams by following the IRS’s Consumer Alerts.
Tax Collections and Your Credit Score
One of the biggest concerns you may have is the effect a tax collection has on your credit score. Luckily, as long as you pay your bill on time and in full, your credit score will most likely not be affected.
However, there is one instance where it could negatively affect your score, and this is dependent on how much you owe the IRS. This is because the only time when credit can be negatively affected is when the IRS takes out a tax liens on your property — which show up as a delinquent account to the credit bureaus, and will remain on your report for seven years after it is paid in full (ten years if it is unpaid). Liens are taken out on properties as a security, so that if payment isn’t made, the IRS can seize and sell that property to make up for the amount that is due. As long as payments are regular and on time, the lien only functions as a backup for the IRS.
Alternatively, the IRS can levy your property to pay for the tax debt that you owe. A levy is different from a lien, and has no direct effect on your credit score. This is because a levy is taken out as a method of payment, instead of a security measure for payment. In other words, the lien is a claim against your assets, while a levy turns a claim into a payment in which you may lose that property to the IRS. According to the IRS: “If you don’t pay or make arrangements to settle your tax debt, the IRS can levy, seize and sell any type of real or personal property that you own or have an interest in.”
Liens are only taken out when the IRS wants to ensure repayment of the amount owed. They can do this at any time during the collection process, which is why it is so important to make timely and full payments on your tax debt. The faster you can deal with tax collections and pay it off, the sooner you can get on with your life and save your credit score.
For more information on what affects your credit score, visit our credit score resource and learning center.
No More Nightmare
Your biggest take away with tax collections should be to pay your debts on time and in full. Taxes might be scary, but dealing with their collection office on top of that can be doubly stressful. Luckily, you can use this new knowledge about the process to help you better understand what to do and who to contact.
If you ever find yourself in this stressful situation, don’t fret. You have protections and options available to help you get back on track to enjoying your life: free of the IRS’s tax collection burden.
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Katie McBeth is a researcher and writer out of Boise, ID, with experience in marketing for small businesses and management. Her favorite subject of study is millennials, and she has been featured on Fortune Magazine and the Quiet Revolution. She researches SEO strategies during the day, and freelances at night. You can follow her writing adventures on Instagram or Twitter: @ktmcbeth
This post was updated December 19, 2017. It was originally published August 29, 2017.