Owing taxes can be confusing and overwhelming. This article tells you about common federal tax notices, liens and levies, and tax collection options.
Common IRS Notices
When you owe federal taxes, the Internal Revenue Service (IRS) will contact you by sending notices. These notices range from telling you how much money you owe and giving you payment options, to telling you the IRS is taking legal action to collect what you owe. Below are the most common types of notices you could get.
CP501 and CP502 Notices
If you owe taxes, the first notice the IRS usually sends a CP501 Notice. In most cases, this notice is a reminder that you owe taxes, and you need to take action (either pay it or dispute it). The tax balance will include the amount you owe plus any interest and estimated penalties that have accrued since the due date.
You may get a CP502 Notice if you do not resolve your tax debt after getting the CP501 Notice. The language in the CP502 Notice is more demanding than the language in the CP501 Notice. It will tell you to pay the balance immediately. The notice may also include new taxes from the current tax year if the taxes listed in your CP501 Notice are from a previous year.
If you do not take action after receiving a CP502 Notice, the IRS usually sends a CP504 Notice next. This notice will list the same information as the CP502, but it will also tell you how the IRS plans to collect your tax debt. The CP504 Notice is a final notice before the IRS starts the process of issuing a tax lien or tax levy on your state income tax refund. To learn more about liens and levies, read the "IRS Forced Collection: Tax Liens, Levies, and Collection Agencies" section below.
If your state income tax refund is not enough to cover your federal tax debt, the IRS will impose a federal tax lien. This type of lien lets the IRS seize any profits you get from selling major assets, such as your house or land.
If you have a payment plan to pay a tax debt and the IRS believes you have defaulted on it, it will send you a CP523 Notice. The IRS will consider you to have defaulted if you miss a payment, have new tax balance due, or if you do not file a tax return. A CP523 Notice will tell you the total amount of your debt, including interest and a failure-to-pay penalty. It will also say that the IRS intends to levy (take) your wages and/or money in your bank accounts. You have 30 days from the date of the notice to take action. One way to take action is sending the IRS a letter saying you do not agree with their finding or that they made a mistake.
CP90/ CP297 Notices
A CP90 Notice or CP297 Notice tells you that the IRS intends to levy (take) property to pay your outstanding tax debt. You have 30 days from the date of the notice to take action. One of the actions you can take is to request a Collection Due Process hearing. You can request this type of hearing using Form 12153. To learn more about this process, read Collection Appeal Rights on the IRS website.
Other Common Notices
If you received a different notice, or if you want to learn more about the notice received, read Understanding Your IRS Notice or Letter. You may also want to talk with a tax lawyer who can help answer questions. Use the Guide to Legal Help to find tax lawyers and clinics who may be able to help you.
What to Do if You Get a Notice
If you get any notice from the IRS, you should take steps to deal with your debt as soon as possible. If you don’t take any action, the IRS can take your state income tax refunds, certain property, and other assets to pay your tax debt.
If you disagree with the amount the IRS says you owe, contact the IRS by calling the toll-free number listed on the top right corner of the notice.
If you agree with the amount the IRS says you owe, or need to stop forced collections activity while you figure out whether or not you owe the money, you can set up a voluntary collection alternative. This could include asking to be considered uncollectible, setting up a payment plan, or asking to settle the debt for something less than the full amount owed.
Dealing With Your Tax Debt
If you are unable to pay off your tax debt with a single payment, you have some options.
Setting up an Installment Agreement (IA)
If you are unable to pay your full tax debt at once, you may ask for an Installment Agreement (IA) from the IRS. IAs allow you to make monthly payments to pay off your debt. In general, the maximum amount of time you can have to pay off your debt is 72 months. If you can pay your tax debt in full within 120 days of it being due, you should not ask for an IA.
Applying for an IA
If you owe $10,000 or less in taxes, the IRS must give you an IA if you ask for it and if all of the following are true:
During the past five years you (and your spouse if filing joint returns) have filed and paid your taxes on time and have not entered into an IA
You agree to pay off your total debt in three years and continue to follow tax laws during the IA
You are financially unable to pay your tax debt in full when it is due
To learn more about applying for an IA, read About Form 9465, Installment Agreement Request on the IRS website.
IA Fees and Other Costs
While getting an IA may make it more manageable to pay off your debt, there are fees associated with IAs. There is a one-time IA user fee to set up your plan. The fee will vary depending on whether you set up your account online and agree to pay by direct debit. Here are the fees:
$31 if you set up an online payment agreement and make your payments by direct debit
$107 if you don’t set up an online payment agreement but make your payments by direct debit
$149 if you set up an online payment agreement but don’t make your payments by direct debit
$225 if you don’t set up an online payment agreement and don’t make your payments by direct debit
You may qualify for a reduced user fee of $43 if your income is below a certain level. When you apply for your IA, the IRS will let you know if qualify for the lower fee.
The IRS will charge interest on your total debt while you are paying it off in installments. The IRS could also charge you late fees for taxes not paid on their due dates.
Offer in Compromise (OIC)
If you are unable to pay your tax debt, or if doing so would create a financial hardship, you can apply for an Offer in Compromise (OIC). An OIC allows you to settle your tax debt with the IRS for less than the full amount you owe. The IRS will consider your ability to pay, income, assets, and expenses when determining whether to approve your OIC. In general, the IRS will approve an OIC when the amount offered is close to the full amount and you will pay it within a reasonable amount of time.
Do You Qualify?
In order to qualify for an OIC, you must be current with all filing and payment requirements. You don’t qualify if you are in an open bankruptcy proceeding. You can use the Offer in Compromise Pre-Qualifier tool to see if you qualify and to prepare an OIC.
If you want to submit an offer, use the OIC Booklet, Form 656-B to get instructions and all the forms you will need. Your application packet will need to include your completed forms, the non-refundable $186 application fee, and the non-refundable initial payment for each Form 656. The fee and payment(s) will be applied to your tax debt. Your payment choice, either lump sum cash or periodic payment, will determine your initial payment amount. If you have low income, you may not have to send in the application fee, initial payment, or make monthly installments while the IRS is reviewing your OIC.
The OIC process, including determining if you have low income, is complicated. You may want to talk to a tax expert before you start the process. Use the Guide to Legal Help to find tax lawyers and tax clinics in your area.
The IRS will look at your income, assets, and expenses to decide how likely it is that they can collect your tax debt in the next ten years. Generally, if the IRS decides they will not be able to collect the full tax debt from you, they will settle the debt for less.
If your offer is accepted, you must meet all the Offer Terms listed in Section 8 of Form 656, including filing all required tax returns and making all payments. Any refunds due to you the calendar year your offer is accepted will be applied to your tax debt. Any liens on your assets won’t be released until all your offer terms are satisfied.
If your offer is rejected, you can appeal that decision within 30 days using Request for Appeal of Offer in Compromise, Form 13711. Be careful with companies who offer to help you complete this form. Some will charge thousands of dollars just to fill out your basic information.
If you have questions about the appeals process, you may want to speak with a tax lawyer or professional. Use the Guide to Legal Help to find tax clinic, lawyers, and legal services near you. If you would like to learn about organizations that could help you for free, read Getting Your Taxes Done for Free.
Currently Not Collectible (CNC) Status
If you are unable to pay off your tax debt, the IRS may agree to postpone collection action by labeling your account as Currently Not Collectible (CNC). If the IRS does this, it will delay collection action until your financial situation improves. The IRS will release any levies on your wages or salary if your account has a CNC status.
Getting a CNC status does not mean your tax debt goes away. CNC status is not permanent. You will eventually have to pay your debt. While you have CNC status, your debt will increase because of the penalties and interest accruing on your account.
In order to get CNC status, you must prove to the IRS you are in a financial hardship. You can do this by filing any of the following forms, along with a detailed description and proof of your financial situation:
These forms ask information about your accounts, lines of credit, real estate, other assets you have, and your monthly living expenses.
Before applying for CNC status, you may want to contact the IRS to discuss your options. A local tax clinic or tax lawyer may also be able to give you advice. Use the Guide to Legal Help to find tax clinics and lawyers near you.
If you do not do anything to deal with your tax debt, the IRS may take forced collection actions against you.
IRS Forced Collection: Tax Liens, Levies, and Collection Agencies
If you do not pay your federal taxes, the IRS will take steps to collect your debt by getting a federal tax lien or levy.
A lien is a legal claim against all your assets (such as real and personal property, bank accounts, and investments) to secure payment of your tax debt. Having a lien does not mean the IRS will take your property, it just means the IRS has an interest in it.
If you don’t take action after the IRS determines you owe taxes and sends you a bill explaining your debt, the IRS will place a lien on your property. When this happens, the IRS may file a Notice of Federal Tax Lien, a public document that alerts creditors the IRS has a legal right to your property. The notice may affect your chance at getting a loan and your credit rating. The notice also protects the IRS’ interest in your assets if you file for bankruptcy or if there is a court case involving your assets.
To learn more about the notice process, read Publication 594, The IRS Collection Process. If the IRS does not file a Lien Notice, no one knows about the lien except you and the IRS, but the IRS can still act on it.
A Lien’s Effects
A lien attaches to all of your assets, even future assets you get while the lien is in place. After the IRS files the Notice of Federal Tax Lien, you may not be able to get credit and your credit score may go down. If you own a business, the lien attaches to all business assets and rights to those assets, including accounts receivable. If you file for bankruptcy, the lien may continue after the bankruptcy.
How to Get Rid of a Lien
Paying your tax debt is the easiest way to get rid of a tax lien. After you pay your debt, the IRS releases your lien within 30 days. If you are not able to pay your debt, you may be eligible for a “discharge” which removes the lien from specific assets. To learn more about discharges, read Instructions on how to apply for Certificate of Discharge from Federal Tax Lien.
You could also request a “withdrawal” of the public notice from the IRS. If your request is granted, you will still owe the debt, but current and potential creditors won’t know about the lien. To learn more about this, read the "General Instruction" section on Form 12277, Application for the Withdrawal and watch the video Lien Notice Withdrawal.
A levy allows the IRS to take your property to pay your tax debt. The IRS could garnish your wages, take money from your bank accounts, and take and sell any real or personal property you have an interest in.
The IRS will levy your property after all of the following happen:
The IRS determines your owe taxes and sends you a bill explaining your debt
You don’t take any action
The IRS sends you a Final Notice of Intent to Levy and Notice of Your Right to A Hearing (levy notice)
The IRS will send the levy notice at least 30 days before the levy is put in place. The IRS may give you the levy notice in person, leave it at your home or place of business, or send it to your last known address. If the IRS sends you the notice by mail, it will do so by certified or registered mail, return receipt requested. If the IRS levies your state tax refund, you may get a Notice of Levy on Your State Tax Refund, Notice of Your Right to Hearing after the levy.
The IRS will release the levy if any of the following happen:
You pay your debt, including any penalties and interest
You give the IRS proof that releasing the levy will help them to collect the debt
You set up an Installment Agreement with the IRS (to learn more, read the "Setting Up an Installment Agreement (IA)" (section above)
The IRS determines the levy is creating a significant economic hardship for you
The expense of selling your property would be greater than the value of the property
Private Collection Agencies
The IRS may assign your case to a private collection agency (PCA). If this happens, the IRS will send you a letter telling you your account is being assigned to a PCA. The letter will list the name and contact information for the PCA. You will also get a copy of Publication 4518, What You Can Expect When the IRS Assigns Your Account to a Private Collection Agency.
There are only four PCAs your account can be assigned to:
CBE Group of Cedar Falls, Iowa
Conserve of Fairport, New York
Performant of Livermore, California
Pioneer of Horseheads, New York
Your account will only be assigned to one of these companies, never to all four. No other private group can represent the IRS.
The PCA will identify themselves as contractors of the IRS collecting taxes. PCA employees must follow the Fair Debt Collection Practices Act. This means they must be courteous and must respect your rights.
PCAs can discuss payment options, including setting up payment agreements with you. However, any tax payment must be made directly to the IRS. A payment should never be sent to the PCA or anyone besides the IRS or the U.S. Treasury. Checks should only be made payable to the United States Treasury. To find out more about available payment options, read Paying Your Taxes on the IRS website.
PCAs cannot take enforcement actions against you. Only IRS employees can take these actions, such as filing a notice of Federal Tax Lien or issuing a levy. To learn more about the new private debt collection program, read Private Debt Collection on the IRS website.