The IRS collection process: a review of the basics.

• Author: Chambers, Valrie

The IRS is the largest collection agency in the country and by far the strongest, empowered by Congress to take actions necessary to collect taxes owed to the federal government. Such a wide-ranging power can easily create some fear among those who do not know the procedures the IRS follows in its collections process.

I he IRS has a straightforward automated collection process. If a client owes taxes, the first letter he or she receives is a CP14 notice, which informs the recipient an income tax amount, along with any penalties and interest, is due and explains the steps to resolve it. (More information is available on the IRS's "Understanding Your CP14 Notice" page at tinyurl. corn/74u7qr1).

The next notice is a CP501, which reminds the taxpayer that he or she has a balance due with the IRS. If the taxes remain unpaid or the taxpayer does not respond to the CP501, the taxpayer will then receive another reminder, CP503. If the previous notices are ignored, the taxpayer will receive CP504, "Notice of Intent to Levy," stating that if the amount due is not paid immediately, the IRS will seize (levy) the taxpayer's state income tax refund or other funds or property and apply it toward the amount owed. This notice must not be ignored if the taxpayer wants to avoid levies or liens. Then, the client may receive Letter 1058, "Final Notice of Intent to Levy and Notice of Your Right to a Hearing."

When notified that a client has received an IRS notice, a CPA should discuss with the client his or her ability to pay the taxes due in full. If the client cannot pay in full, the next step is to have the client sign a Form 2848, Power of Attorney and Declaration of Representative, which must be filed before the IRS can disclose the taxpayer's account information to the CPA. (Note that Form 2848 changed in late 2011. Married clients who file joint returns must each sign a separate Form 2848; a joint Form 2848 is no longer acceptable.) After filing the Form 2848, the CPA should contact the IRS immediately to try to avoid other actions, such as the filing of a notice of federal tax lien, a levy on assets or wages, or offsetting of a state tax refund. However, some taxpayers cannot immediately pay what they owe. If so, they have several options for paying the balance due over time.

Alternative Payment Options

The first option is to apply for an extension of up to 120 days to pay if the taxpayer can pay that amount in full within that time. The IRS does not...