IRS collections

Most of the people who come to us with a collection problem have a stack of unopened envelopes. Nobody blames them. But the IRS runs collections as a sequence, each letter with a deadline and a consequence printed on it, and the whole system is built around the assumption that you will answer at some point before the end. Here is the sequence, what each step can and cannot do to you, the rights that come with it, and what we do at each rung.

How a tax debt is born

Collection starts with an assessment: the IRS records that you owe a specific amount for a specific year. That happens when you file a return showing a balance you did not pay; when the IRS changes your return (a math error, a CP2000 matching notice you did not answer, an audit) and the 90-day window to go to Tax Court closes; or when you never filed and the IRS prepared a substitute return for you from the 1099s and W-2s it had, with no deductions. Within 60 days of the assessment the IRS must send a notice and demand for payment. That is the CP14, and the ten-year collection clock starts with the assessment date on it.

Two things are worth knowing at this point. If the assessment is wrong, because a return was never filed, or the CP2000 added income that was already reported, or the substitute return ignored your basis in the stock you sold, the fix is to file or amend, not to argue with collections; a correct return lowers the balance and often erases it. And interest and the failure-to-pay penalty began running on the original due date, not on the CP14, so a bill that arrives in August for an April balance is already four months bigger than the tax.

The five letters, in order

For an individual with an unpaid balance the automated collection system sends the same sequence every time, about five weeks apart, each restating the balance with more interest.

• CP14, Notice and Demand. The bill. Twenty-one days to pay. Nothing happens if you do not, except the next letter, but this is the cheapest moment to set up a plan, because the failure-to-pay penalty is cut in half once an installment agreement is in place.
• CP501, Reminder. Same bill. No new consequence.
• CP503, Second Reminder. Same bill, with a warning that a federal tax lien may be filed.
• CP504, Notice of Intent to Levy. This one is printed in a different tone and it alarms people, which is the point. What it actually authorizes is a levy on your state tax refund, and nothing else, without further notice. It is the last letter before the real one.
• LT11, or Letter 1058, or CP90, Final Notice of Intent to Levy and Notice of Your Right to a Hearing. This is the letter the whole system has been building toward. It is sent by certified mail. It says the IRS intends to levy your property, and it tells you that you have 30 days to request a Collection Due Process hearing. If you do nothing, on day 31 the IRS can levy your bank account, garnish your wages, and take 15% of your Social Security, with no further notice. Which of the three versions you get depends on which IRS unit has your account; they mean the same thing.

From the CP14 to the final notice is usually four to six months. There is also a letter asking you to call (LT16) that can appear in the middle, an annual statement of the balance (CP71) on accounts that have gone quiet, and, since 2024, the LT38 that restarted notices after the pandemic pause. None of those changes the order.

The 30-day letters and the 90-day letter

People use these phrases loosely, and the IRS uses several different letters that each carry a deadline. The ones worth keeping straight:

• The 30-day letter in an audit (Letter 525 or 915) is the examination report. You have 30 days to agree or to appeal within the IRS. This is before any debt exists.
• The 90-day letter (CP3219A, a notice of deficiency) comes next if you did not agree. Ninety days to petition the Tax Court, and that is the only deadline in the system that cannot be extended for any reason. Miss it and the tax is assessed and collections begins.
• The 30-day final notice in collections (LT11, Letter 1058, CP90) is the one above. Thirty days to request a hearing before levy.
• The 30-day lien notice (Letter 3172) is sent within five business days after the IRS files a lien at the county, and gives 30 days from then to request a hearing on the lien.
• The 60-day letters are different animals: a math-error notice (CP11 or CP12) gives 60 days to ask that the change be reversed, and a trust fund recovery penalty letter (Letter 1153) gives 60 days to appeal a payroll-tax assessment against you personally. Neither is a collection step; both are the last chance before an amount becomes collectible.

The lien

A federal tax lien exists automatically, by statute, the moment an assessment goes unpaid after demand. It attaches to everything you own and everything you acquire later. What the IRS chooses to do, usually at the CP503 stage or once a balance exceeds about $10,000, is file notice of it with the county clerk, which makes it public and puts it ahead of later creditors. The filing is what people mean by “a lien was put on my house.” Since 2018 the credit bureaus no longer report tax liens, so the credit score effect is gone, but a title company will find it the day you try to sell or refinance, and it must be paid or released at closing.

Within five business days of filing, the IRS sends Letter 3172 with 30 days to request a hearing. The hearing can argue that the lien should not have been filed or that an alternative (a payment plan) makes it unnecessary. Short of paying, there are three ways to deal with a filed lien: withdrawal (Form 12277), which removes the notice entirely and is available once you are in a direct-debit installment agreement with a balance under $25,000; discharge, which releases one specific property so it can be sold, with the IRS paid from the proceeds; and subordination, which lets a lender refinance ahead of the IRS when the refinance helps pay the debt. All three are applications with a few weeks’ turnaround; none happens on its own at a closing table.

The levy

A lien is a claim; a levy is a taking. After the 30 days on the final notice run out, the IRS can:

• Levy a bank account. The bank freezes what is in the account on the day the levy arrives, up to the balance owed, and holds it 21 days before sending it to the IRS. Deposits made after that day are not taken. The 21 days exist so you can call and work something out; most bank levies we see are released within them once a plan is in place.
• Garnish wages. A wage levy is continuous: it attaches to every paycheck until released or paid. The employer withholds everything above an exempt amount based on your filing status and dependents, which for most people is a few hundred dollars a week. This is the levy that forces people into our office, and it is released the same week an installment agreement is accepted.
• Take Social Security. Fifteen percent of each monthly benefit under the Federal Payment Levy Program, automatically and indefinitely, after its own final notice (CP91 or CP298).
• Take a state refund (after CP504), federal payments to you as a contractor, and accounts receivable if you have a business.
• Reach a retirement account. The IRS can levy an IRA or 401(k) even though ordinary creditors cannot, but treats it as a last resort requiring a revenue officer’s finding of flagrant conduct.
• Seize property, a car, a boat, real estate. Rare, requires a revenue officer and management approval, and almost never a principal residence, which needs a court order.

The hearing you are entitled to

The 30-day final notice and the lien notice each give you the right to a Collection Due Process hearing, requested on Form 12153. Requesting it in time stops any levy while the hearing is pending and gives you an appeals officer, not a collector, who must consider whether the IRS followed the rules, whether a payment alternative would work, and, if you never had a chance to dispute the tax itself, whether the amount is right. If you lose, you can take it to Tax Court. The hearing is the single most useful right in the collection system and it is forfeited by missing 30 days. If you miss them, you can still ask for an equivalent hearing within a year, which gets you the same appeals officer but no stay of levy and no Tax Court. For other collection actions, a rejected payment plan, a terminated agreement, a levy already made, there is the faster Collection Appeals Program (Form 9423), decided in days, with no court review.

How to make it stop

Every option below has one prerequisite: the returns must be filed, all of them, for at least the last six years. The IRS will not grant a payment plan or an offer to a non-filer. For many of our clients, filing the missing years is both the first step and most of the solution, because a correct return is smaller than the substitute the IRS prepared.

• Pay it. Including borrowing to pay it, if the rate is below the IRS’s 7% plus the half-percent-a-month penalty.
• Short-term plan. Up to 180 days, no setup fee, set up online. Interest and penalty continue.
• Installment agreement. Up to 72 months for a balance under $50,000 with no financial statement required (the “simple” or streamlined plan); balances to $10,000 are guaranteed if you have been compliant. Above $50,000 a financial statement, Form 433-F or 433-A, is required and the IRS looks at what you can pay. The failure-to-pay penalty drops to a quarter percent a month while the agreement is in force, and a direct-debit agreement keeps the lien from being filed under $50,000. Miss a payment and the CP523 gives 30 days to catch up before it terminates.
• Partial-payment installment agreement. When the numbers show you cannot pay it off in the time left on the clock, the IRS will take what you can pay monthly and let the rest expire at the ten-year mark. Reviewed every two years.
• Currently not collectible. If the financial statement shows no room to pay at all after the IRS’s living-expense standards, collection stops. The debt remains, interest runs, the lien may be filed, and the IRS checks back when your income rises. For a retiree on Social Security with a large old balance this is often the honest answer.
• Offer in compromise. Settling for what the IRS could collect anyway, when that is less than the balance. The real program, and the one the radio ads lie about; we send it to counsel. See the offer in compromise.
• Bankruptcy. Income tax more than three years past its due date, assessed more than 240 days, with returns filed more than two years ago, can be discharged in Chapter 7; Chapter 13 can stretch a newer debt over five years without further penalty. A bankruptcy attorney’s call, and one worth asking about when the balance is old and the income is not.

Two things that are not in the list: ignoring it, and the “we settle for pennies” companies. The first just moves you down the ladder. The second charges a fee to file the Form 9465 you could have filed yourself.

The things that happen on the side

• Passport. Once a debt is “seriously delinquent,” over roughly $65,000 with a levy issued or lien filed and the hearing rights used up, the IRS certifies it to the State Department (CP508C), which will not issue or renew a passport until it is reversed. A payment plan reverses it.
• Private collection agencies. Older, inactive balances are assigned to one of the IRS’s contracted collectors, announced by a CP40 letter. They can call. They cannot levy, and they will never ask for a gift card or a wire; anyone who does is a scammer.
• Refund offsets. Every refund you are owed, federal or state, is applied to the balance until it is paid.
• Payroll taxes. If the debt is a business’s unpaid withholding, the IRS can assess the trust-fund portion against the owner and anyone who signed checks, personally, after Letter 1153. That debt is not dischargeable in bankruptcy and follows the person, not the company.
• The ten-year clock. The collection statute expiration date is ten years from assessment, extended by the time an offer, a bankruptcy, or a Collection Due Process hearing was pending, plus some months. Debts do expire; a balance from 2014 may be gone or nearly gone, and the first thing we check on any old account is the date.