Overview Of Collection Notices
Collections notices mailed by the Internal Revenue Service must be dealt with immediately. Ignoring a notice will result in subsequent stages of IRS action.
The Collection Procedure
Sometimes the IRS sends multiple letters that are identical. Sometimes a notice of tax due is misplaced and a levy notice is the first correspondence received. In order to avoid missing letters and notices from the IRS, taxpayers may designate someone else as an additional recipient with a power of attorney. The IRS sends a copy of the letter to the tax professional designated by the power of attorney, which is granted using IRS Form 2848. These designated individuals are usually certified public accountants (CPAs) or IRS Enrolled Agents (EAs).
There are several sources for enrolled agent lookup. Enrolled agents who are members of the National Association of Enrolled Agents complete 30 educational hours each year. Most of this course work consists of online continuing education credits.
The IRS has several collection actions available if no response is received to the initial notice of tax due. Usually, the IRS will levy bank accounts or wages. In addition, a common collection practice is placing liens on property. This affects the taxpayer’s credit rating and borrowing ability. Refinancing a home that has a tax lien attached is only possible with IRS approval. The IRS also has authority to seize property and liquidate it with a public sale.
The IRS is permitted by law to share tax information with city and state tax agencies. In addition, the law allows the IRS to contact anyone who might assist with investigating a tax debt. This includes the taxpayer’s neighbors, employer, bank, and co-workers.
Some tax collection notices are not related to errors on tax returns or misstatements of income. Rather, they are assessments of penalties and interest for underpayment of IRS estimated tax payments. This is an opportunity to accurately calculate estimated tax payments. A CPA is not required. An EA is duly capable of this task due to the required completion of tax courses.
Not all collection notices are accurate. Some simply indicate that the IRS is unable to match declared income of a taxpayer to payments of income reported by those who paid the taxpayer. On many occasions, notices are the result of mismatched information from different sources. Some income that a notice may claim is not reported has in fact been reported and taxed. If income has been omitted from a tax return, the IRS notice does not indicate any offsetting deductible expenses or cost.
A common collection notice indicates income reported to the IRS by payers that is not identifiable on the tax return of the recipient. This includes interest, dividends, non-employee compensation, and proceeds from securities sales.
Collection notices from the IRS often address a Form 1099-MISC. This income may already be reported on the tax return of a partnership or S corporation of the taxpayer. Or a pending amended tax return may include business expenses that offset the added income. A reply to the notice should reference the expectation of an amended tax return filing.
Notices that reference income on securities sales calculate tax on the entire sale proceeds. The cost basis of the sold assets must be reported on an amended schedule to adjust the tax computation.
A tax professional is most capable of comparing information in the notice to the tax return. Sometimes a reply is not necessary. A notice may state that the taxpayer will receive a bill for the tax if there is no response disagreeing with the notice of tax due. Alternatively, the notice may request return of the notice with signature and payment. Either way, timely assessment of the accuracy in the notice is imperative. Interest charges continue to accrue during any delay.
An IRS notice usually covers a very specific issue about a tax return. Instructions on the notice about replies should be followed exactly. Responses should concisely target the issue in the notice. The best response method is in writing with copies retained. Any facts stated in the response should be supported with attached proof.
Commonly, the IRS may grant an extension of time for response to the notice. When this is obtained by phone, a short confirmation letter should be sent to the IRS, indicating the name and badge number of the agent who provided the extension and the date granted.
Taxpayers have the right for representation by others when dealing with IRS matters. When there is disagreement with the tax assessment in a collection notice, a factual immediate response is essential. A taxpayer representative is experienced with presenting relevant information to the IRS.
A professional tax representative can also obtain IRS approval for delay of any further collection process. Delays may be granted until there’s a change in the taxpayer’s financial circumstances.
Although we live in an information age of instant online communication, taxpayers should not attempt to address all tax issue by themselves.