The IRS Collection Process: Payment Plans, Offers, Liens and Levies

How collection starts

Collection begins with paperwork, not with a levy. The IRS sends a first bill, then at least one further bill if the balance goes unpaid, and then a final bill. Enforcement actions only begin after that final bill is unpaid. When a revenue officer becomes involved, unannounced visits are rare: normally the officer mails an appointment letter or telephones to arrange a visit. A taxpayer who thinks the bill is wrong should come to the discussion with the bill itself and the supporting records, the return, cancelled checks or other documents showing why the figure is not right.

Installment agreements and their thresholds

The dollar limits differ by taxpayer type and by plan length, and the exam tests them precisely. An individual whose combined balance of tax, penalty and interest is $50,000 or less may apply online for a long-term plan at a reduced setup fee. An individual owing up to $100,000 may apply online for a short-term plan running up to 180 days. A business owing $25,000 or less in assessed payroll taxes, penalty and interest for the current and prior calendar year may use the online payment agreement application. A setup fee may apply to agreements longer than 180 days, and every applicant must have filed all required returns before a plan can be granted.

• For a taxpayer who filed on time, the late payment penalty accrues at 0.25% per month during an installment agreement instead of the usual rate of up to 1% per month
• Interest and penalties keep running until the balance is paid in full, even after the agreement is approved
• The IRS may still file a Notice of Federal Tax Lien despite an approved agreement
• Form 2159, Payroll Deduction Agreement, is completed in addition to Form 9465 to pay by payroll deduction
• A Partial Payment Installment Agreement is for a taxpayer who cannot pay in full by the collection statute expiration date, and it is reviewed every two years

Offers in compromise

An offer in compromise can rest on three grounds: doubt that the assessed debt is accurate, doubt as to collectibility because the taxpayer's assets and income are insufficient, or effective tax administration where exceptional circumstances would make full collection cause economic hardship or be unfair. The form follows the ground. Form 656-L is used for doubt as to liability; Form 656 is used where the taxpayer cannot pay or would suffer hardship. Two eligibility rules come up constantly: the IRS cannot consider an offer while the taxpayer is in bankruptcy, and a business must have made its required federal tax deposits for the current quarter and the two preceding quarters before the offer will be considered.

Delay, the collection statute and what suspends it

A taxpayer whose payment would prevent them meeting basic living expenses may ask the IRS to delay collection, which places the account in currently not collectible status. It is a delay, not forgiveness: penalties and interest continue to accrue and a Notice of Federal Tax Lien may still be filed. Underneath everything sits the collection statute. The IRS can attempt to collect for up to ten years from the date the tax was assessed. Certain periods suspend the running of that clock, including any period the taxpayer lives continuously outside the United States for at least six months, and, where a request is rejected, a further 30 days plus however long Appeals takes to consider an appeal.

Appealing a collection action

There are two routes, and knowing which fits which situation is the exam question. Collection Due Process gives a taxpayer a hearing before an independent Appeals officer following certain notices, such as the notice of federal tax lien filing or the final notice of intent to levy, and a CDP determination can be taken to the Tax Court. The Collection Appeals Program is faster and covers a wider set of actions, including proposed or actual liens, levies and seizures and the rejection or termination of an installment agreement, but a CAP decision is binding and cannot be taken to court. In both, Appeals keeps a strict separation from the Collection function and will not discuss the strength or weakness of a case with it.