The Collections Process
As a prerequisite to collection, the IRS must assess the tax and send the taxpayer a notice and demand for payment. § 6303. An assessment is the recording of a tax liability into the IRS system on Form 23-C (Assessment Certificate). IRC § 6203. The information recorded includes the taxpayer’s name, social security number, year in question and the amount and type of tax involved. The date on which Form 23-C is signed is called the assessment date. This date is important because it triggers two statutes of limitations: (1) the time within which the taxpayer must receive a notice of tax due and a demand for payment and (2) the time within which the tax may be collected. The IRS must notify the taxpayer of the assessment within 60 days from the date of assessment, and the IRS has 10 years from the assessment date to collect the tax. IRC § 6502(a)(1).
If the taxpayer does not respond to the first notice of tax due, then the IRS is likely to send up to four more notices before commencing collection activity. IRC § 6303. If tax is not paid after assessment and notice and demand, a lien in favor of the IRS automatically occurs. § 6321. This is sometimes referred to as a “secret” lien. If the IRS then wants to file a lien that is actually recorded in a public records office, it must follow the procedures of § 6320 and § 6330. These are statutory notices. They provide the taxpayer with information on requesting a collection due process hearing. See the section on Collection Due Process for more information.
After the initial notice of tax due, the four notices are: Reminder Balance Due (CP-501), Important 2nd Notice Balance Due (CP-503), Urgent Final Notice Balance Due (CP-504), and Final Notice of Intent to Levy and Notice of Your Right to a Hearing (CP-90). This last notice explains the rights that the taxpayer has under § 6330 before the actual levy action is begun.
If the taxpayer fails to respond to these notices, the IRS may then levy property, seize and sell the property, file a tax lien, take withholdings, and garnish wages and other payments. Some taxpayers do not come to the Clinic until the IRS has engaged in these actions.
Thus, the process associated with collecting tax from when a tax return is filed until the tax is collected can be summarized, as follows:
- Return filed
- Audit notice
- 30-Day letter (administrative)
- 90-Day letter (statutory)
- Appeals Conference
- Decision Document determining the deficiency. § 6211
- Assessment. §§ 6201-03
If the tax is not paid after assessment, the sequence of events beginning with assessment and ending with collection of the tax is as follows:
- Notice and Demand for Payment within 60 days of assessment. § 6303
- Statutory Lien. § 6321
- Series of requests for payment. § 6502
- Authority to collect the tax. § 6301
- Possibly a Notice of Lien (Due Process Notice/30-day letter). § 6320
- Notice of Intent to levy (30-day letter). § 6330
- Levy. § 6331
Whenever tax has been assessed and the taxpayer is either (a) not liable for the tax, (b) unable to pay the tax, or (c) both liable for and able to pay the tax but to do so would create a hardship, then an offer in compromise can be filed. § 7122
As an alternative, a taxpayer that is able to pay the tax over time may enter into an installment agreement.
In working with your client concerning a collection matter, it is recommended that you ask the client to complete either a Form 433 A or 433 F(the simplified form) prior to talking with the IRS. One or the other of these forms is used for Currently Not Collectable determination, Installment Agreements, Collection Due Process requests, and Offers in Compromise. In some cases, you can complete the essential portions of the form by specking with your client over the telephone. By doing so, you should have sufficient information to discuss the matter with the IRS. In most instances, the IRS will attempt to complete an electronic version of the 433 while talking with you. For most clients the critical portions of the 433 A are the asset portion dealing with their home (if they own it) or automobile and the income section. It is helpful to review at least one wage statement so you can determine what items are deducted from the client’s wages and how often the client is paid. The IRS allows most items that are deducted from a client’s wages to be treated as necessary expenses. Below is a link to the 433-A and 433-F as well as a news release that discusses the completion of the 433.
Form 433-A (NOT OIC) - Collection Information Statement for Wage Earners and Self- Employed Individuals
Form 433-F - Collection Information Statement – (Short Form)