When Will the IRS Come After You for Back Taxes? (2024)

When Will the IRS Come After You for Back Taxes? (1)

If you do not pay your tax liability or fail to submit a tax return, the IRS will begin the collection process to settle your tax bill. But the timeline varies based on the situation, which can be very confusing for tax payers. Understanding the IRS collection process is critical when it comes to back taxes.

Owe taxes? Have unfiled returns? Wondering when the IRS is going to start coming after you? In this article, we’ll go through the IRS collection timeline, the statute of limitations, collection methods, and how to prevent similar situations in the future. Or contact us today to get help from our tax attorneys now.

IRS Collection Timeline

If you do not pay your tax in full when you file your tax return, you will be sent a bill for the amount owed. This bill initiates the collection process, which will continue until the debt is satisfied or the IRS is no longer legally permitted to collect the tax, such as when the time or period for collection expires.

The first notice you will receive will be a letter explaining the balance due and demanding full payment. It will include the tax amount as well as any penalties and interest collected on your outstanding debt since the tax was due. After that, you will get one or two additional notices about your balance due, and then, the IRS will send a final notice of intent to levy. Generally, the IRS takes your tax refunds first, but if you still don’t pay, the agency can seize bank accounts, wages, and property.

When Does the IRS Start Sending Collection Notices?

The timing of the first notice depends on the situation. For example, during the COVID pandemic, the agency stopped sending many notices. Thus, some people with unpaid tax bills didn’t get a notice for a year or two after filing their returns.

In usual times, the first notice usually goes out a couple of months after the return was filed. Once the IRS sends the first notice, subsequent notices come every six to eight weeks.

Common Demands for Payment Notices

The IRS sends out many types of demand letters and notices. Here are the most common:

CP14 Notice: This is generally the first notice that goes out if an outstanding balance is owed. This automated notice alerts you about your unpaid balance and payment options. There is no need to stress at this point since there will be a few more notices before the IRS takes aggressive collection actions.
CP501 – Reminder of IRS Balance Due: This is one of the first notices sent by the IRS after a balance has been assessed and they have not received payment. At this point, they have already assessed some penalties and interest for the past due tax balance.
CP503 Notice – Second Reminder of Balance Due: This notice generally follows CP501 about six weeks later. This is part of the IRS’s automated collection system, as the notices get a little harsher before they take collection actions.
CP504 – Notice of Intent to Levy: This is essentially a notice that the IRS plans to seize your assets if you do not pay your tax bill. Because bank accounts and wages are easier to reach, the IRS frequently levies them. They can even target your pension and home.
CP91 – Intent to Levy on Social Security Benefits: If you receive a CP91 notice from the IRS, it means that they are threatening to seize part of your social security payments if you do not settle your unpaid taxes. This will take 30 days before they can eventually levy your social security. Before you get a CP91, the IRS will send you a couple of letters about your unpaid taxes.
Letter 2050: A Letter 2050 from the IRS indicates that they want you to contact them about any unpaid taxes or overdue tax returns. The letter offers a list of IRS Collections numbers that you can call. If you receive a Letter 2050, the IRS has most likely already sent you additional letters of levy, such as a CP504.
LT-11 Notice – Intent to Levy and Notice of Your Right to a Hearing: Receiving an LT-11 indicates that the IRS plans to levy your property or property rights. You have 30 days before they can take action. The IRS has the authority to seize your wages, bank account, personal and business assets, and pension benefits. In addition, they have the authority to revoke your US passport.

IRS Assessment Timeline

The IRS uses a structured timeline to assess any owed taxes after a taxpayer has filed their return. For example, if you file a return saying that you earned x amount of income, but the IRS discovers that you had additional income, the agency will assess a tax against you. But when?

The assessment period generally begins with the filing of the return and concludes when the IRS formally records the amount owed by the individual. This timeline is critical because it establishes the time frame for the IRS to lawfully determine and communicate the taxpayer’s outstanding liabilities.

The assessment timelines are intricately linked to the statute of limitations, which specifies the timeframe within which the IRS may assert new tax assessments. Understanding this timeline is critical for taxpayers since it explains when their tax payments are due. Consider the following:

Statute of Limitation on Audits

The statute of Limitations on audits is a legal timeframe that regulates when the IRS can begin an audit for a certain tax year. This statute limits the government’s authority to review and assess additional taxes for a certain tax return. In general, the IRS has three years to conduct an audit from the date of filing or the due date of the tax return, whichever is later.

Collection Timeline if Tax Returns Aren’t Filed

Failing to file a tax return can lead to a separate collection timeline by the IRS. Here’s an overview of what to expect if you fail to file your tax return:

A demand to file: If you fail to file your tax return by the due date, the IRS will initiate contact to remind you of your obligation. Generally, this doesn’t happen until at least six months after the due date, and by this time, the failure-to-file penalty can already be up to 25% of your balance due.
Failure-to-file penalties: The IRS imposes penalties for not filing tax returns by the deadline. These penalties accrue over time, increasing the amount owed.
Substitute for return: If you continue to neglect filing, the IRS may create a Substitute for Return (SFR) on your behalf. More information is below.
Statute of Limitations: The statute of limitations (SOL) for collections begins with the filing of an SFR. Once the IRS assesses the tax debt, the 10-year statute of limitations on collections starts, during which the IRS can pursue collection actions.
Automated Collection System (ACS) or Revenue Officer: Depending on the complexity of your case, the IRS may handle collections through the ACS or assign a revenue officer. Revenue officers have broader authority to take more serious actions, including wage garnishment or asset seizure.

What Is a Substitute for Return?

A substitute for return (SFR) is a process initiated by the IRS when a taxpayer fails to file their obligated tax return. When this occurs, the IRS creates an SFR on behalf of the taxpayer based on available information, such as W-2s, 1099s, and other income-related documents. The SFR aims to estimate the taxpayer’s liability but often doesn’t account for potential deductions, credits, or exceptions that the taxpayer might be entitled to claim.

As a result, the assessed tax liability through an SFR is typically higher than what the taxpayer might actually owe. Once the SFR is filed, the IRS can begin the collection process to recover the estimated tax debt. Again, the timing of an SFR can vary, but typically, the IRS issues an SFR about three years after the due date. Once that happens, the IRS can come after you for the unpaid taxes, as explained below.

How an SFR Triggers the Statute of Limitations

The SFR process also has implications for the statute of limitations (SOL) on collections. When the IRS files an SFR on behalf of a taxpayer, it initiates the assessment of the tax liability.

Importantly, the collection statute of limitations begins on the date of this assessment. The IRS usually has ten years from the date of assessment to collect the owed taxes. As a result, the SFR not only produces an estimated tax burden for the individual, but it also starts the clock on the timeframe in which the IRS can pursue collection activities.

SOL on IRS Collections

In general, the IRS has ten years from the date of assessment to collect taxes owed by a taxpayer. This means that once the IRS assesses a tax debt—whether through a filed return or a Substitute for Return (SFR)—the clock begins ticking on the agency’s ability to pursue collections.

The IRS loses its legal right to collect the outstanding tax bill after this ten-year period expires. It is critical for taxpayers to be aware of this timeframe because it provides some relief and assurance by indicating that their tax liabilities may become unenforceable after the given time period.

Things That May Extend the Statute

Several factors can extend the SOL on IRS collections, including:

Requesting an installment agreement: The extension occurs because, under the terms of the installment agreement, the IRS typically agrees not to take enforced collection actions, such as levies or wage garnishments, against the taxpayer while the agreement is pending. This temporary suspension of collection efforts effectively pauses the running of the SOL clock. As a result, the SOL is extended by the amount of time it takes the IRS to review the application for the payment plan.
Filing for bankruptcy: When an individual files for bankruptcy, an automatic stay is triggered, preventing creditors, including the IRS, from taking collection actions against the debtor. The automatic stay temporarily halts collection activities, such as wage garnishments, bank levies, or property seizures. This effectively suspends the running of the SOL clock for the duration of the bankruptcy case.
Collection Due Process (CPD) Hearing: During the CDP hearing, certain collection activities are typically put on hold. This includes actions such as wage garnishments, bank levies, and property seizures. The time during which the CDP hearing is pending is not counted toward the statute of limitations on IRS collections. This effectively extends the period during which the IRS is legally allowed to pursue collection actions.

Why is There a Flurry of Collection Actions Right Before the Statute of Limitations Expires?

In the lead-up to the expiration of the statute of limitations on IRS collections, there may be a flurry of collection actions, even if the IRS has not been actively pursuing the taxpayer in the past. The impending expiration creates a sense of urgency for the IRS to enforce collection and secure any outstanding tax liabilities before the legal window closes.

Taxpayers may find themselves subject to increased efforts, such as more letters, notices, and potentially more aggressive collection methods. The IRS aims to maximize its ability to collect the owed taxes within the statutory timeframe, prompting heightened activity as the deadline approaches.

This underscores the importance for taxpayers to stay informed about their tax obligations, address any outstanding issues proactively, and seek professional advice if facing collection actions as the statute of limitations draws near.

How the IRS Finds Taxpayers

The IRS employs various strategies to track down taxpayers who haven’t paid their taxes or have failed to file their tax returns. Here are a few ways the IRS uncovers non-compliance.

Tax-Related Documents

One common way is to obtain tax-related documentation from third parties such as employers, banks, and other payers. The information gathered from these sources provides important information about a person’s income and financial activity, assisting the IRS in discovering potential noncompliance.

Tax-related documents include:

W-2 Forms: Issued by employers, W-2 forms detail an individual’s earnings, tax withholdings, and other compensation-related information.
1099 Forms: These forms report income from various sources other than employment, such as freelance work, dividends, interest, or contract work.
1098 Forms: Used for reporting mortgage interest, student loan interest, or tuition payments, providing insights into individuals’ financial obligations.
Schedule K-1: Typically associated with partnerships, S corporations, and trusts, it reports income, deductions, and credits allocated to the taxpayer.
Bank Statements: Examining bank records can reveal financial transactions, large deposits, and other activities indicative of income or non-compliance.

Data Matching

The IRS uses this process to cross-reference information from tax returns with data from employers, banking institutions, and other third parties. The IRS can use this comprehensive comparison to evaluate the accuracy of reported income, find errors, and uncover probable cases of underreporting or evasion.

Audit Triggers

These triggers can be specific patterns, discrepancies, or irregularities identified during the automated review of tax returns. Factors such as unusually high deductions, inconsistent reporting, or deviations from statistical norms may raise red flags. When an audit trigger is activated, it prompts a closer examination of the taxpayer’s financial records, ensuring that reported information aligns with the actual financial activity. This proactive approach allows the IRS to identify and address instances of noncompliance.

IRS Collection Methods

Once the IRS decides to pursue unpaid tax debts, it employs a range of collection methods to ensure compliance.

Automated Collection System (ACS)

The Automated Collection System (ACS) is often utilized for less complex cases, employing automated processes to send notices and communications prompting taxpayers to address their outstanding balances promptly. ACS is particularly effective for smaller amounts owed.

Revenue Officer Assignment

In more intricate cases or when dealing with larger outstanding balances, the IRS may assign a Revenue Officer to oversee the collection process. Revenue Officers possess the authority to take personalized and assertive actions, including issuing levies, seizing assets, or initiating wage garnishments. Their involvement becomes crucial when the automated processes of ACS prove insufficient or when dealing with complex financial situations.

Notice of Federal Tax Lien (NFTL)

To secure its interest in the taxpayer’s property, the IRS may file a Notice of Federal Tax Lien, which becomes a public record and may have an impact on the taxpayer’s credit.

Bank Levies

To repay outstanding tax debts, the IRS may impose a bank levy to seize funds straight from a taxpayer’s bank account.

Wage Garnishment

The IRS has the authority to garnish a taxpayer’s wages, asking their employer to withdraw a percentage of their salary to settle outstanding taxes.

Seizure of Assets

In extreme cases, the IRS has the authority to seize and sell a taxpayer’s assets, such as real estate, vehicles, or other valuable property, to satisfy the tax debt.

Why You Should Reach Out to the IRS Proactively

When dealing with back taxes, reaching out to the IRS ahead of time is a wise strategy with several advantages. Contacting the IRS shows a willingness to resolve tax issues properly, which the IRS may appreciate.

Taxpayers can often explore alternative resolution options, such as setting up payment plans or negotiating settlements, by taking a proactive approach before more aggressive collection proceedings are launched. It allows for open communication with the IRS, potentially avoiding penalties and significant interest accruals.

Ultimately, proactive engagement with the IRS reflects a commitment to resolving tax matters responsibly and can contribute to a more cooperative and constructive interaction with tax authorities. It’s always better to reach out to the IRS, rather than to wait for them to find you. First, being proactive is better for your peace of mind than worrying about the unknown. Second, even if the IRS hasn’t contacted you, penalties and interest are accruing on your account.

When to Get Help from a Tax Pro

If you find yourself facing complex tax issues, large amounts owed, or challenges understanding the IRS collection process, it’s advisable to consult with a tax pro. Tax professionals, such as CPAs or enrolled agents, are knowledgeable about tax laws, regulations, and negotiation methods. They can assist you with assessing your specific situation, exploring possible resolution possibilities, and guiding you through the process of attaining a favorable outcome.

Whether it’s establishing payment plans, negotiating settlements, or dealing with more complex tax issues, the help of a tax professional may give you clarity, limit your potential risks, and help you get compliant with tax legislation.

How to Avoid Worrying About the IRS in the Future

Worrying about the IRS can be avoided with proactive steps and strategic planning. Here are key measures to ensure a smoother tax experience in the future.

File on Time

Consistently filing your tax returns on time is crucial. Late filings can lead to penalties and unnecessary stress. Set reminders, organize your financial documents, and submit your returns promptly.

Proper Tax Planning

Take the time to understand your tax situation and plan ahead of time. Throughout the year, you should assess your income, deductions, and credits. Additionally, take advantage of advanced tax planning strategies. This includes organizing your tax records, understanding your filing status, and strategically allocating funds to tax-deferred accounts. Proper planning can lead to long-term tax benefits and financial stability.

Stay Informed About Tax Changes

Tax rules change, and staying informed is critical. Changes in tax regulations, deductions, and credits should be reviewed on a regular basis. This knowledge enables you to make informed decisions, potentially lowering your tax liability and reducing the chance of unforeseen tax issues.

Get Help from W Tax Group

Navigating the complexities of back taxes demands a proactive approach. Whether it’s setting up payment plans, negotiating settlements, or addressing more serious back taxes, W Tax Group is here to help. We can help you explore alternative resolution options and avoid aggressive collection proceedings. Don’t let back taxes become a source of stress; let W Tax Group guide you toward a favorable resolution and financial peace of mind.

If you are concerned about your back taxes, have received a notice from the IRS, or have questions regarding collection processes, call the qualified team at the W Tax Group for a free consultation and the answers you need. We’ll start with a free consultation. Then, we’ll help you develop a plan to get back into good standing with the IRS.