The IRS has contacted me. Now what?
The IRS has several ways that they may contact you. Often, a taxpayer will receive a series of four letters, each one sounding more serious and threatening than the last. If you are not familiar with the practice and procedure of the IRS, these letters can be confusing and unsettling. What do they mean and which ones really mean business?
The first letter informs you that the IRS has assessed a tax liability against you. This letter may be a CP14. They are asking you to pay your tax liability. If you get this letter, the IRS is now your creditor and they will start the process to collect their money from you. This letter is not particularly threatening. What happens if you ignore the first letter?
Second Letter – CP501
You can expect letter number 2. It will say “CP501” in the top right corner of the letter. It tends to arrive a few weeks after the first letter if no action is taken, usually about 5 weeks. This is a standard form letter and is a reminder notice that you owe money to the IRS. This letter is sent because there was no response to the first letter and tends to not be any more threatening than the first letter. The CP501 is the first time that the IRS informs you of their right to place a federal tax lien on your property or levy on your assets.
Third Letter – CP503
In approximately another 5 weeks (10 weeks after the first letter), if you still have taken no action, you will receive a third letter, the CP 503. This is a reminder to pay letter. Some may choose not to respond to this letter. What happens next?
Fourth Letter – CP504
Sometime later, you will receive CP 504. It says “Intent to levy” in regular font. In much larger, bold font, it will say, “Intent to seize your property or rights to property, Amount due immediately: $________.” However, if you read if carefully, it is threatening to seize only state income tax refunds. So while at first, the letter seems very ominous, threatening to levy on state tax refunds takes some of the teeth out of the letter.
Letter 1058 – Now Come the Problems
Four letters have come and you have taken no action. What happens next? You will likely receive letter 1058, Notice of Intent of Levy. It is titled:
Notice of Intent to Levy and Notice of Your Right to a Hearing
Please Respond Immediately
Starting thirty days after the date of that letter, the IRS intends to levy on your wages, bank accounts, or other property. “Levy” is another word for “take,” as in the IRS will take your wages directly from your employer.
Letter 1058 has great legal significance. The IRS cannot levy, beyond state income tax refunds, until after it issues this letter. It is always sent certified mail, though it is effective whether you accept or reject the letter, so there is little incentive to refuse to accept it. The first four letters are meant to scare you into paying the tax, penalties and interest, and have little legal significance. Letter CP 504 has a bit of legal significance, because after issuing it, the IRS can start levying state tax refunds, if there are any.
What should you do if you get Letter 1058? If you have received this letter, the IRS’s attempts to collect the tax it thinks you owe have been unsuccessful. Maybe you have not been opening your mail, maybe you can’t pay the amount owed, maybe you feel that you do not owe this money. Don’t ignore this letter – it signals that a potentially major negative series of events is about to happen in your life.
In Letter 1058, you are given 30 days to file for a Collection Due Process Hearing (CDP). This is done on Form 12153. The IRS Appeals Division presides over the hearing, the purpose of which is to determine whether the collection activity by the IRS is appropriate. The Appeals Branch is separate and independent from the Collections Division. You might find them more reasonable to work with. Filing for a CDP stops the IRS from further collection activity (no levies) at least until the hearing, which could be several months away.
What are some of the potential outcomes of a CDP hearing? Often, a taxpayer or the taxpayer’s representative, will file an offer in compromise at this point. An offer in compromise settles your tax debt for some amount less than it is worth, which is one of the reasons why offers in compromise have a low acceptance rate at the IRS. Alternatively, the taxpayer may set up an installment payment plan with the IRS. Where warranted, the IRS will agree that the account is temporarily uncollectable. In such a case, the IRS will cease all collection activity and review the matter from time to time (usually annually) to see if the taxpayer’s financial circumstances have changed.
As mentioned, the IRS will stop collection activity while the CDP hearing is pending. At the conclusion of the hearing, if it is determined that enforced collection activity should be resumed, a Notice of Determination will be issued. The IRS is may now levy your wages and property unless you file a lawsuit in the United States District Court. Filing a lawsuit will again stop IRS enforcement activity.
An important point to note is that the IRS has 10 years to collect taxes that you owe. This is called a statute of limitations. During a CDP hearing and a District Court lawsuit, the statute of limitations is “tolled.” This means that the 10-year statute is extended by the amount of time during which the IRS is prohibited from taking action against you.
When should you get an attorney involved? Most people are unfamiliar with the workings of the IRS. If you have gotten to the point where you have received Letter 1058, much has already occurred in your tax case and this letter could signify big problems coming down the road in a very short time frame. Unless you both agree with the amount of tax, interest and penalty shown and can pay it, statements that you make innocently can further complicate the resolution to your tax matter. Get someone involved who has experience and can insulate you from the IRS; the earlier, the better. Getting someone involved at the last minute cuts out many options that might help get your matter resolved in a reasonable way.
The IRS never just goes away. Many clients initiate contact with an attorney when they receive the first letter. Do not delay. Your financial future may depend on it.