Overview
Most of you know that I am a big music fan. I have always liked Joe Cocker. The song The Letter is a song that was originally performed by The Box Tops and was a Number 1 hit in 1967. The song was covered by Joe Cocker in a live performance in his album Mad Dogs and Englishmen. It is a soulful rendition with Leon Russell on keyboards and B3 Hammond organ, a great horn section and backup singers. It was his first top ten hit in the United States.
For most Americans, there is nothing more emotionally upsetting than receiving a letter from the IRS. I am sure there are many husbands who have either thought about hiding the letter from their wives or at least downplayed the content of the letter once it has arrived. I once met a very successful business man who told me that while he would not be happy if the FBI raided his house or office, the same raid executed by the IRS would be far worse. For most Americans, the collection of mail from the mail box and discovery of a letter from the IRS physically increases the taxpayer's blood pressure and heart rate. This blog focuses on the reasons why taxpayers receive and IRS letter and what are remedies to take when a taxpayer receives a letter.
IRS Collection Letters
Why does a taxpayer receive a collection letter from the IRS? A taxpayer usually receives a letter from the IRS Collections Division as a result of filing a tax return with a balance due or failing to file a return at all forcing the IRS to create a tax return for the taxpayer, a "Substitute for Return (SFR)." The situation gets out of control because the taxpayer is frequently underwithheld as a result of not making adequate estimated quarterly payments from self-employment income. It can happen in many different ways. A taxpayer may claim too many withholding exemptions in order to maintain sufficient income to support his current lifestyle. Alternatively, a taxpayer can receive a large amount of income and not adjust his estimated quarterly payments.
The situation frequently gets out of control because the taxpayer is so panicked that he does not even bother to open the letter believing the problem will go away on its own. It won't ! After the IRS receives the tax return, the return is processed and the tax is assessed. A billing notice is sent and the tax goes unpaid. A silent tax lien arises by federal statute attaching to all of the taxpayer's assets as well as later acquired assets. After a series of IRS Letters - (1) Letter CP-501 - Billing Notice. stating that the taxpayer has a balance due; (2) CP-503- Reminder Notice. notifying the taxpayer that a balance is due and the IRS has not heard from the taxpayer; (3) CP504- Threat to Levy (4) Letter 11/CP-90/Letter 1058- Final Notice of Intent to Levy and Taxpayer's Right to a Hearing. The notices tend to be sent approximately three weeks apart. Letter 11 is a critical letter because it commences the 30-day window for the taxpayer to request a collection due process hearing. If the taxpayer misses this time window, he may file for an equivalent hearing within one year. The IRS files a Notice of Federal Tax Lien in the public records if the taxpayer owns more than $10,000. The federal tax lien notices commences the 30-day window for the taxpayer to request a collection due process hearing. If the taxpayer misses this time window, he may file for an equivalent hearing within one year.
Surprisingly, only three percent of taxpayers tax advantage of their appeal once a Notice of Intent to Levy is received. The appeal is filed using Form 12153 within thirty days of receiving Letter 11. The appeal ceases all collection activity against the taxpayer. The taxpayer has the right to go to Tax Court if the taxpayer cannot work out an arrangement With Appeals. If the taxpayer misses the 30-day deadline, the taxpayer has the right to an equivalent hearing. However, IRS collection activity does not stop for an equivalent hearing. Additionally, there is no right to proceed to Tax Court.
Summary
This article has briefly outlined the IRS tax collection process. There are a few avoidable problems. First, open the mail. The IRS problem will not go away on its own. Second, even though it will be painful, let her spouse know. Chances are you filed a joint return so that the tax liability is joint. Third, the obvious, pay the tax or make arrangements to pay on installment. Lastly, if the situation get out of hand and the IRS has filed a lien, tax advantage of the collection due process hearing. Tax problems can be overwhelming. The best thing to do is to call a tax professional to help you sort out your options. Call me!
