Understanding Your IRS Notice

When you receive an IRS notice, the first reaction is to panic and want to toss the envelope into the trash can!  We recommend that you don’t do that but instead, take a deep breath and keep the following in mind:

  1. An IRS notice typically will be about your federal tax return or tax account. It will be about a specific issue, such as changes to your account. It may ask you for more information. It could also explain that you owe tax and that you need to pay the amount that is due.
  1. Each notice has specific instructions, so read it carefully. It will tell you what you need to do.
  1. If you agree with the notice, you usually don’t need to reply unless it gives you other instructions or you need to make a payment.
  1. If you do not agree with the notice, it’s important for you to respond. You should write a letter to explain why you disagree. Include any information and documents you want the IRS to consider. Mail your reply with the bottom tear-off portion of the notice OR respond via fax if a number is provided.
  1. Always keep copies of any notices you receive with your other tax records.

There are dozens of IRS notices that one can receive; for a comprehensive list check out this link on the IRS’ website.  Listed below is a brief summary of some of the more common notices and a description of what they mean.

CP10:  The IRS made a change(s) to your return because they believe there’s a miscalculation. This change affected the estimated tax payment you wanted applied to your taxes for next year.

CP11:  The IRS made changes to your return because they  believe there’s a miscalculation. You owe money on your taxes as a result of these changes.

CP14:  This IRS sent you this notice because you owe money on unpaid taxes.

CP54G:  Your tax return shows a different name and/or ID number from the information the IRS has for your account.

CP2000:  The income and/or payment information the IRS has on file doesn’t match the information you reported on your tax return.  This could affect your tax return; it may cause an increase or decrease in your tax, or may not change it at all.

CP2005:  The IRS accepted the information you sent them. They’re not going to change your tax return and have closed their review of it.

CP2501:  You need to contact the IRS as they have received information not reported on your tax return.

Form 668Y:  Notice of Federal Tax Lien.

CP501:  You have a balance due (money you owe the IRS) on one of your tax accounts.

CP503:  Reminder notice that the IRS has heard from you and you still have an unpaid balance on one of your tax accounts.  Typically sent 30 days after the filing of a tax lien.

CP504:  Notice of intent to level.  If you do not pay the amount due immediately, the IRS will seize (levy) your property and apply it to pay the amount you owe.  Typically sent 30 days after the above notice.

LT1058:  Final Notice prior to levy.  If no response is received within 30 days, the IRS can levy you.  This is also your opportunity to request a hearing with regards to the matter.

Understanding IRS Collection Procedures

The U.S. Internal Revenue Service is the single largest collections agency in the world.  According to the most recent statistics available, in 2013 the IRS spent $11.6 billion and employed just under 87,000 to collect more than $2.8 trillion in tax revenue.  Of those 87,000 personnel, over 19,000 are directly involved in enforced collections against taxpayers that owe back taxes.

While the IRS is one bill collector that can have a serious impact on your life, it’s important to understand just how they work.  So the first thing to realize is that the IRS is a slow moving bureaucracy.  It is highly driven by forms, written procedures and is resistant to change.  Their playbook is public record and they are required to follow it.  While this may not bode well for you resolving your tax matters expeditiously, it does give you some comfort in that you can figure out what is coming next.  Below we break the IRS collections process down into the 1040 notice sequence and the collections system.

1040 Notice Sequence
The IRS doesn’t start collections against you simply because you file a return with a balance due.  The process actually begins when they issue a letter called a Statutory Notice of Deficiency or SNOD.  This letter informs you of the IRS’ intent to assess a tax deficiency and informs you of your rights to dispute the proposed adjustment.  From here, the notice sequence progresses like this if you fail to respond at each stage:

  • Request For Payment
  • Form 668 – Notice of Federal Tax Lien Filing (for balances over $10,000)
  • CP501 – Reminder Notice
  • CP503 – Immediate Action Required
  • CP504 – Notice of Intent to Levy
  • Letter 1058 – Finial Notice of Intent to Levy

The CP503 typically comes about 4-5 weeks after the first notice.  The remaining notices will each come around 30 days after one another so it can take about 4 months from the initial letter until it culminates with a Letter 1058.  While the CP504 language sounds nasty, one may choose to ignore it.  However, there are two things to note about the Letter 1058:

  1. It is the first opportunity you have to file an appeal
  2. Thirty days after the letter, the IRS can levy you.

Does this mean that the IRS will levy you?  Not necessarily; especially if they don’t know where your assets are.  However, it would be wise to pick up the phone at this point and call the IRS as well as file Form 12153, Request for Collection Due Process Hearing (i.e. appeal).

Collections System
Now you may ask why understanding the “system” is even important to this discussion.  Well, it’s because some of the notices you get aren’t being generated by humans.  They are done on an automated schedule.  Thus, until your case winds up with a dedicated “human” at some point (i.e. a Revenue Officer) it can be hard/frustrating trying to get the notices to stop.  Thus, collections enter into the following levels of the system at varying stages:

  1. Collection efforts on each account begin with computer notices from a Regional Compliance Center.
  2.  If the efforts of the Compliance Center  don’t yield payment, the account is then assigned to the Automated Collection System (ACS). ACS attempts to collect the tax liability by initiating telephone calls to the taxpayer and others. Unless your case has special circumstances, you will usually stay assigned to ACS even if you accumulate 2-3 years worth of tax debt as an individual or 3-4 quarters of payroll liability as a business.  But once you reach these levels or you simply fail to respond…
  3.  The account is eventually assigned to a Revenue Officer for a field investigation.

When you are assigned to a Revenue Officer, the course of your tax case can take a sudden shift. Having an experienced, trained human being looking at your tax case, and passing judgment on you based on what’s in a file and thereby determining how they are going to handle your tax case, means a lot.  Unfortunately, due to current economic times, the waiting line for assignment to an RO is many areas of the country is growing longer and longer.

Similar to above, having a trained representative on your side working the case with the IRS can mean a world of difference.  If you are interested in assistance or just want to discuss your situation, we’d be happy to speak with you.  Simply shoot us an email or give us a call.

Until next time…