In a March 2022 blog, I wrote about the IRS suspension of more than a dozen automated collection letters and notices associated with the filing of a tax return or payment of tax. The suspension was in response to the enormous processing backlog of paper tax returns and correspondence. At the time, I was one of the individuals advocating to stop the notices until the IRS addressed the high volume of calls and millions of pieces of unprocessed correspondence. However, a year and a half later, the suspension of those letters and notices is still in place, but is expected to come to an end sometime this calendar year.

My concern is the longer the notices are delayed, the more that taxpayers may have a false sense that the IRS may have forgotten about their tax balance—or maybe taxpayers fail to understand that interest and penalties continue to accrue until final payment. But regardless of a taxpayer’s understanding, the IRS does remember those outstanding balances, and as long as the balance goes unpaid, interest and applicable penalties continue to accrue.

Caveat: As discussed in my July 11, 2023 and July 12, 2023 blogs, if you live in a disaster area and the IRS has provided additional time to pay your tax due, interest and penalties associated with the relief granted should not accrue. You should check IRS.gov and verify the actual payment due date.

Things to Know About Outstanding Tax Balances

Rather than wait for the IRS to resume sending notices, taxpayers may benefit from acting now to stop additional interest and penalties from accruing. Ignoring unfiled tax returns or unpaid taxes only makes the situation worse (and more expensive). It’s important to know:

• Penalties and interest continue to accrue until final payment. I discussed the impact of the failure to file penalty, failure to pay penalty, and interest in my April 17, 2023 blog (NTA Blog: Why It’s Important to File Your Tax Return Timely, Even if You Can’t Pay), reminding taxpayers of the importance of timely filing tax returns and paying any balance due.
• The IRS will offset current refunds and overpayments. The IRS will apply current refunds to cover prior unpaid tax debts as well as certain other qualifying debts.
• Although notices were suspended, IRS enforcement continues on a case-by-case basis, potentially subjecting taxpayers to a levy on wages or bank accounts and/or a notice of federal tax lien filing.
• The IRS continues to certify seriously delinquent tax debts to the State Department, which can result in the State Department revoking a taxpayer’s passport or denying a passport renewal.

Recommendation

To proactively address unfiled returns and unpaid taxes, taxpayers can create or access their online account at IRS.gov. Through an online account, taxpayers can view their balance, make payments, and apply for a payment plan. Taxpayers may also determine balances due by requesting account transcripts, by mail or phone, or by calling the IRS for a current balance, including penalties and interest. You can find detailed instructions about getting transcripts at TAS Get Help – Getting a Transcript.

Taxpayers should consider paying the balance due as soon as practical. The IRS offers several options to make payments online using a bank account or credit card. Payments of any amount will help reduce future penalties and interest. For those unable to pay in full, the IRS offers various payment plans that taxpayers can request online, by submitting Form 9465, Installment Agreement Request, or by calling the IRS. For more detailed information on payment plans, including user fees and low-income waivers, go to TAS Get Help – Payment Plans.

If a taxpayer cannot pay the taxes in full, the taxpayer may submit an Offer in Compromise. The IRS provides a pre-qualifier tool to determine eligibility. Use of the tool does not guarantee offer acceptance. For more information on offers in compromise, see TAS Get Help – Offer in Compromise.

Taxpayers can also request a payment pause by requesting Currently Not Collectible Status. The IRS will analyze your ability to pay based on your income and expenses, and if the IRS agrees that you cannot pay, it generally won’t try to collect from you. However, penalties and interest will continue to accrue. For more information on currently not collectible status, see TAS Get Help – Currently Not Collectible.  

Collection Process

Even with the suspension of the notices, the IRS continued to mail the initial collection notice and demand letter, Notice CP14, for any outstanding tax, interest, or penalties due. When the IRS begins sending automated collection notices again, I expect the collection process to proceed as follows:

1. If payment is still outstanding, the balance due account enters the notice stream, which triggers the IRS to mail subsequent notices to the taxpayer, including a notice of intent to levy.
2. The account will be assigned to the Automated Collection System (ACS) unit. Taxpayers can call the ACS line in response to collection notices and discuss payment options.
3. If certain criteria are met, the account is assigned to a field collection revenue officer. Typically, these cases are more complex in nature, have higher balances due, or involve business entities.
4. Both ACS and field collection may issue levies, file notices of federal tax lien, and use other enforcement tools to collect the outstanding balance.

Taxpayers should consider addressing any outstanding tax issues now rather than waiting for the IRS to contact them. For advice, taxpayers should consider reaching out to a tax professional or, if eligible, contact a Low Income Taxpayer Clinic (LITC) for assistance. More information on LITCs is provided below.

Penalty Relief

If a taxpayer qualifies, there are several options for requesting penalty relief. The taxpayer may qualify if they can show the failure to timely file the required return or pay taxes due on time was due to reasonable cause and not willful neglect. To establish reasonable cause, the taxpayers must show that they acted with ordinary business care and prudence but were unable to file the return within the prescribed time or were unable to pay the tax by the due date or that payment on the due date would cause an undue hardship. Reasonable cause is determined case by case considering all the facts and circumstances.

First-Time Abate (FTA) may also be an option to consider when the taxpayer can show filing compliance, payment compliance, and a clean penalty history. Taxpayers must show they did not have to file a return or had no penalties assessed against them in the prior three years (or any penalty was removed for an acceptable reason other than FTA, for example, due to reasonable cause); have timely filed all required returns (or filed a valid extension); and have paid or have a valid payment plan to pay all taxes due for years other than the year for which the relief is requested. Supporting documentation is not required if a taxpayer meets FTA criteria. However, taxpayers must request penalty relief, in writing or on the phone, to be considered for FTA.

Please consult IRS.gov for types of penalty relief.

Stay tuned for Part Two where I will discuss the revised guidance for unannounced revenue officer visits to taxpayers.

Low Income Taxpayer Clinics

LITCs are independent from the IRS and the Taxpayer Advocate Service (TAS). LITCs represent individuals whose income is below a certain level and who need to resolve tax problems with the IRS. LITCs can represent taxpayers in audits, appeals, and tax collection disputes before the IRS and in court. In addition, LITCs can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Services are offered for free or a small fee. For more information or to find an LITC near you, see the LITC page at www.taxpayeradvocate.irs.gov/litc or IRS Publication 4134, Low Income Taxpayer Clinic List. This publication is also available online at Forms & Instructions | Internal Revenue Service (irs.gov) or by calling the IRS toll-free at 800-TAX-FORM (800-829-3676).