Understanding the IRS collections process can help you regain control of your finances. As a tax attorney who has helped thousands of clients resolve their back taxes, I can assure you there are always options available, even if you’re already facing collection actions.

Why Does the IRS Begin the Collections Process?

The IRS initiates collections when you have unpaid tax liabilities, typically in these situations:

• You filed your return but couldn’t pay the full amount owed
• You failed to file a return and the IRS prepared a substitute return
• An audit determined you owe additional taxes
• Errors on your return led to underpayment
• You’re self-employed but failed to make estimated tax payments

What many taxpayers don’t realize is that ignoring tax debt only makes the situation worse. The IRS adds both interest and penalties to unpaid taxes, which can significantly increase your debt over time. Interest compounds daily, and failure-to-pay penalties can add up to 25% of the unpaid tax.

Steps the IRS Takes to Recover Unpaid Taxes

Step 1: Notification of Tax Debt

The collections process begins when the IRS sends you a CP14 “Balance Due” notice, sent within weeks after you file your return or the IRS makes an assessment. This notice informs you of the amount due, including any interest and penalties.

If you don’t respond, the IRS sends additional collection notices, each becoming more urgent. Each notice provides information about what you owe and your payment options. Reading these notices carefully and responding promptly is essential to prevent escalation of collection activities.

Step 2: Demand for Payment

If you continue to ignore IRS notices, you’ll receive a “Final Notice of Intent to Levy and Notice of Your Right to a Hearing” (Letter 1058). This formal demand for payment informs you the IRS intends to take enforcement actions if you don’t:

• Pay the full amount due
• Set up an installment agreement
• Prove you can’t pay due to financial hardship
• Appeal the collection action within 30 days

Step 3: Enforcement Actions

Without a response to the final notice, the IRS can take several enforcement actions:

Tax Liens: A federal tax lien is a legal claim against all your property, including assets you acquire after the lien arises. The IRS may file a Notice of Federal Tax Lien, which alerts creditors that the government has a claim against your property.

Tax Levies: A levy is when the IRS actually takes your property to satisfy the back taxes. The IRS can levy:

• Bank accounts
• Wages (wage garnishment)
• Social Security benefits
• Retirement income
• Accounts receivable
• Other property and assets

Wage Garnishment: The IRS can order your employer to withhold a portion of your paycheck and send it directly to the IRS. Unlike most creditors, the IRS doesn’t need a court order to garnish wages.

Asset Seizure: In extreme cases, the IRS can seize and sell property, including:

• Your home
• Vehicles
• Business assets
• Other personal property

It’s important to note, however, that certain types of property are exempt from seizure.

Passport Revocation or Denial: If you owe over $52,000, the IRS may certify your tax debt to the State Department.  This could result in a denial of your passport application or a revocation of your current passport.

What Are Your Options if You Owe Taxes?

Now that we’ve covered all of the terrible things the IRS can do to you if you don’t pay your taxes, let’s move on to the different solutions available to you. We explore these in greater detail in other sections of the Guide.

Set Up an Installment Agreement

An installment agreement allows you to pay your tax debt over time through regular monthly payments. The IRS offers several types:

• Guaranteed Installment Agreements for debts under $10,000
• Streamlined Installment Agreements for debts up to $50,000
• Partial Payment Installment Agreements when you can’t pay the full amount

File an Offer in Compromise

An Offer in Compromise allows you to settle your tax debt for less than the full amount owed. The IRS may accept an OIC if:

• There’s doubt about the assessed tax accuracy
• You can’t pay the full amount
• Collection of the full amount would create financial hardship

Request Currently Not Collectible Status

If you’re experiencing significant financial hardship, you can request that the IRS place your account in Currently Not Collectible (CNC) status. When your account is designated as CNC, the IRS temporarily halts collection actions while you’re unable to pay.

Consider Bankruptcy

In some situations, filing for bankruptcy may help resolve tax debts. Certain tax debts can be discharged through bankruptcy proceedings, though specific timing and qualification requirements must be met. Bankruptcy for taxes should generally be considered a last resort.

How to Avoid Future IRS Collections Issues

To stay in compliance and avoid future tax problems, be sure to:

• File all returns on time, even if you can’t pay in full
• Adjust withholding or estimated tax payments
• Set aside money for tax payments in advance if self-employed
• Keep accurate financial records
• Address tax issues promptly

Don’t Wait to Take Action

The worst thing you can do with tax debt is nothing. The IRS has significant collection powers, but they also provide various options for taxpayers who are proactive about addressing their debt. Contact us today at (800) 571-7175 for a free case review. Let us help you find the best solution for your tax situation.