Years ago, the IRS would often initiate contact with a taxpayer via a phone call. Due to the numerous telephone scams including some involving the impersonation of IRS employees, the IRS now initiates all contact by mail. Therefore, it is important for taxpayers and their representatives to carefully read each piece of mail that the IRS sends.
The majority of IRS correspondence, whether a letter or notice, involves either a collection or examination matter. Although many of the letters and notices can have the same basic look and contain similar language, there are key distinctions that must be considered when responding.
Collection notices follow a pattern similar to a business sending bills. When taxpayers fail to pay IRS debt, the language in the notices escalates over time from a routine initial Notice CP 14 or CP 22 requesting payment in 10 days to the taxpayer ultimately receiving a CP 504 notice indicating an intent to levy. A levy, also known as a seizure, is a collection step in which the IRS identifies certain taxpayer assets and moves to legally seize those assets to pay the assessed taxes.
Although the CP 504 notice doesn’t give the IRS the authority to begin the levy process, the notice is a precursor to the Notice CP 90 or Letter 1058, which allow the IRS to begin the levy process. Along the way, the IRS typically files a Notice of Federal Tax Lien in the local courthouse. A lien can put the IRS in line to receive the proceeds of a real estate sale. Thus, unpaid IRS debt often is collected by IRS when a taxpayer sells his personal residence. Also, liens are public records, so a taxpayer loses a degree of privacy when a lien is filed.
Payment Options
The IRS understandably prefers full payment, and many taxpayers find it best to borrow from a bank or other lender to pay the IRS. It’s much easier to owe the local bank than the IRS. Another payment option involves an installment agreement in which the debt is paid monthly like a car loan. These plans can range from 120 days to 72 months.
Many taxpayers seek to settle debt through an Offer in Compromise, which, if accepted by IRS, is a settlement of the total debt for a reduced amount. These are sometimes called “pennies-on-the-dollar” settlements and can be quite difficult to obtain and typically involve paying a much higher percentage than pennies on the dollar. Another option is to have the IRS determine that the debt is currently not collectible. This is frequently done in cases where the taxpayer simply doesn’t have the financial capacity to pay on the debt.
Finally, the statute of limitations for the IRS to collect the debt may remove the debt from the IRS books. Generally, the IRS has 10 years from the date the tax was assessed to collect. Once this statute expires, the unpaid portion of this debt is no longer legally collectible.
IRS Examinations
Notices and letters advising taxpayers of an IRS examination are another major category of IRS correspondence. An examination is the IRS term for what the public calls an audit; the IRS frequently uses these terms interchangeably. The examination notice or letter should indicate whether the action is a correspondence, office or field audit.
A correspondence audit is the least intrusive of the three and focuses on a few issues such as omitted income or large, unusual or questionable deductions. Office audits usually involve less-complex tax returns and are audited at an IRS office during a scheduled appointment. The field audit is the most comprehensive of these three types of audits. It typically involves the agent’s request for an in-person interview and, in the case of a business owner, a tour of the business.
Respond to a Notice
The most important step to take with an examination notice or letter is the response. Ignoring the letter or not responding timely always makes the situation worse. A taxpayer may choose not to respond, but the IRS will still conduct the examination using the records it already has or can legally obtain. In almost every case, ignoring an IRS examination notice will result in a higher tax assessment than would have been assessed if the taxpayer had responded.
Additionally, taxpayers under examination who continue to ignore correspondence related to the examination will ultimately lose the right to appeal the results. Ignoring a Statutory Notice of Deficiency, or “90-day letter” as it is commonly called, will allow the IRS to assess the tax deficiency after the 90 days have passed. This will initiate the IRS collection process. Although there are still some avenues open to mitigate the tax assessment at this point, they are not easy avenues to travel.
