The Basic Principles of the IRS Collection Process
In our previous post, we discussed how audits are performed and your available options throughout the examination process. Once the audit is complete, and all administrative and legal remedies are exhausted, how does the IRS actually collect taxes? The first step in the IRS collection process is assessment.
The “Silent” Lien
This next bit comes as somewhat of a nasty shock to taxpayers. At the moment that the IRS assesses a liability against a taxpayer, a lien on all of the taxpayer’s property arises—even if the IRS has not officially recorded it. That being said, this “silent” lien, as it is known, must be recorded to have priority over other creditors. The IRS may send you a Notice of Federal Tax Lien (NFTL) giving you notice that a lien has been recorded—generally in the county where you live.
Twin Rights to a Collection Due Process Appeal
The receipt of a NFTL gives you the right to a collection due process (CDP) hearing with Appeals, which I’ll discuss in a moment. If the taxpayer does not request a CDP hearing, or if the CDP appeal is not successful, then the IRS can collect an assessed tax through a “levy.” Before levying on the taxpayer’s property (garnishing bank accounts and the like), the IRS must send the taxpayer a Notice of Intent to Levy. Once again, this notice provides the taxpayer with the right to request a CDP hearing.
What is a CDP Appeal?
Terribly good question.
Importantly, if you did not challenge your underlying liability after receiving a notice of deficiency, you cannot raise it in a CDP appeal. If you did not receive a notice of deficiency, or otherwise did not have an opportunity to challenge the liability before it was assessed, then you can raise it for the first time in a CDP appeal.
When might you not have been able to challenge a liability before assessment? Another terribly good question. The IRS can automatically assess certain penalties without issuing a notice of deficiency. The easiest way to think about this is that if the IRS believes that you are liable for a penalty, and there is no underpayment or underreporting of tax (which is all a deficiency is), then the penalty is an “assessable” penalty. This means that the IRS can move past “Go,” and seek to collect its $200 without a notice of deficiency being issued first.
Thus, if the IRS is proposing to levy your business’ bank accounts, and you cannot make payroll to pay Bob Cratchit, this likely does not pass muster. Think of Tiny Tim, you’ll argue. Appeals’ discretion is rather wide, but most settlement officers don’t have hearts two sizes too small.
The Tax Court Petition
If you still do not reach a resolution through your CDP appeal, the Appeals will issue a “notice of determination” sustaining the lien or levy. At this point, you will have 30 days to petition the Tax Court to review the determination, most commonly arguing that Appeals abused its discretion in sustaining the collection action.
A Note on Collection Alternatives
Although you may propose a collection alternative during the IRS collection process at a CDP hearing, such as an offer-in-compromise (OIC) or an installment agreement (IA), you must make a “concrete” proposal. Appeals is not obligated to create a collection alternative for you. The IRS (unlike an unrequited lover) need not wait indefinitely for the taxpayer (true love) to submit requested documents (to return on the morrow). You must also be current with your tax obligations, meaning that you must have filed all of your returns, and you must be current with your estimated tax payments (if any).
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