The IRS Collection Process: How the IRS Collects Taxes You Owe

Did you fail to file your taxes by April 15th? You might forget, but the IRS won’t.

The IRS takes taxes seriously. Taxation is its raison d’etre. If you fail to file or pay your taxes, the government has both reason and the means to come after you.

How does it get what it’s owed? We’ll walk you through the IRS collection process to show how the government makes sure everyone pays their fair share.

Playing Nice: The First Steps in the IRS Collection Process

If you file your tax return without paying the amount due, the IRS starts by sending what it probably feels is a gentle reminder.

People who owe tax receive a bill – a first notice – for the amount due. It outlines exactly what’s due and requests that you pay the balance in full. You may find that the amount is higher than what your tax return required initially.

Why? Because the IRS begins to collect penalties and interest on unpaid balances starting the day after your tax payment is due – either April 15th or the last day of the extension period.

The IRS tacks on compounded interest and a monthly late fee, so your outstanding balance grows each month. Even if you pay part of the balance, you continue paying both the interest and fees until you settle the entire balance.

How bad could the interest rate be? The IRS says it costs less to pay back a cash advance from your credit card or a personal loan than to let the interest on back taxes pile up.

Unable to Pay: What Happens Next

In an ideal world, you can make the full payment and be done with it. Unfortunately, it’s not possible for all of us to wave the tax burden away.

The IRS requests that taxpayers at least attempt at paying the balance with a lump sum.

If you can’t pay the balance in full and have no other means of financing, get in touch with the IRS.

Whether you work directly with the IRS or a third-service, only the IRS can grant you a payment plan or negotiate a tax bill. If you think you’ll need help paying, start negotiating sooner rather than later.

Options for Paying Over Time

The IRS collection process is amenable to proposed solutions as long as you respond to its letters.

If you know when you file that full payment is impossible, you can send in the Online Payment Agreement (OPA) or call the IRS. A successful application gives you up to 120 days to pay the balance, and there’s no fee. However, you will still pay interest and fees.

Those who know 120 days is not enough time can ask for a monthly installment agreement. If granted, you can make payments one of several ways:

  • Bank account direct debit
  • Payroll deduction
  • Credit card online or over the phone
  • Cash at a retail partner
  • Check or money order

The IRS prefers a direct debit from your bank account and offers more leniency when you choose that option. Other methods come with higher operating costs, and you’ll pay significantly more for them.

Offer in Compromise

Here’s something you might not know about the IRS: it forgives (but doesn’t forget).

If your tax liability is too significant for a payment plan or it would harm your quality of life, you can negotiate with the IRS using an offer in compromise (OIC).

An OIC is a partial payment installment agreement. It reduces the total amount owed and sets up a payment plan to clear up the balance.

To qualify for an OIC, you must:

  • File all previous tax returns
  • Make all required payments for the current tax year
  • Meet all current quarter tax obligations (businesses only)

Unfortunately, you can’t ask for an OIC if you are currently in an open bankruptcy case.

You’ll Pay No Matter What: How the IRS Collects Defaults

You have ample opportunity to respond to the IRS’s requests for payment or get in touch yourself (or via an accountant or tax attorney) to set up a payment plan.

If you fail to respond and do not pay your taxes – or the full amount owed – the IRS comes to collect.

The IRS has a unique power. Unlike creditors, it does not require a judgment to initiate collections. It can go straight to garnishing your wages.

The process begins with a notice stating what you owe, when to pay it, and how.

If you do not respond or comply, the IRS can then:

If the IRS garnishes your wages, it is also exempt from other creditor’s barriers. The IRS can take as much as it wants from you and leave only what you require for essential living expenses.

Wage garnishment, like asset seizure and property liens, as a last resort. It is expensive for the IRS. You can learn more about the process on this site.

How Long Does the IRS Have to Collect Taxes?

How long can the IRS chase you down for back taxes?

The law imposes a ten-year statute of limitations on collections.

In other words, the IRS cannot attempt to collect taxes from a return filed in 2000. It can, however, chase your 2018 return until 2027.

The Bottom Line on Tax Collection

The IRS may have ten years to collect taxes due on a tax return, but the IRS collection process ensures that it gets its money one way or another.

Don’t wait for the IRS to garnish your wages or seize your assets. If you can’t pay what you owe, hire an accountant or get in touch with the IRS to discuss your options early. Many people don’t have the means to pay their tax debt off in one go, and the IRS offers plenty of solutions.

Ready to learn something new? Check out all our tax-related stories right here.

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