Navigating IRS Balance-Due Notices

During the pandemic, the IRS paused some of its collection and compliance notifications through the remainder of 2022. They specifically stated they would be holding balance-due reminders as the IRS needs time to get caught up on processing paper returns and additional backlogged items.

Although the IRS is currently suppressing certain notices, it's important not to get too comfortable as they can’t pause all letters. For example, the IRS has about 9 million notifications that are sent out each year. One notification that can’t be suppressed is the CP14 notice and demand for tax. This notification is required by law or Internal revenue Code Section 5303. The notice must be sent within 60 days after the IRS assesses an individual’s taxes.

A majority of the CP14 notices sent out request payment within 21 days of receiving the notification. If a taxpayer does not respond to the notice with the requested payment, the IRS can begin to collect taxes by levy or by filing a notice of federal tax lien. However, prior to starting the enforced collection process, the IRS generally sends the taxpayer a series of reminders known as the collection notice stream.

What should you do if you receive a CP14 notice? First, it is important that you do not ignore it. You need to determine how you plan on taking care of the outstanding tax balance. The IRS gives you five options to consider when it comes to resolving your debt.

1. Pay the entire tax balance

If your finances allow for it, you can always pay your outstanding balance in full. This would be your easiest option. If you do not pay in full, you will have to pay the current interest rate as well as a 0.5% failure to pay penalty each month on the additional tax balance.

If you are interested in paying in full, review your balance on the CP14 notice. You can make a payment by going to IRS.gov and using the IRS Direct Pay option. If you pay by check or by another form, it is important to check the status of your payment with the IRS.

2. Get an extension to pay

If you feel you need additional time to get your funds in order, you could request an extension-to-pay agreement with the IRS. It will allow for an extension up to 180 days, which is referred to as a short-term payment agreement.

If you owe less than $100,000, you can request the extension by using the online IRS payment agreement tool or contact the IRS assistance. Once you have sent in your request, you will receive a letter confirming the 180-day extension and they will give you the payoff amount for the 180-day date.

During the extension period, you will be allowed to make payments or you can wait until the end of the 180 days to pay. If you are unable to pay the full balance before the extension period expires, you will need to contact the IRS to set up a different option.

If your account has already been assigned to local field collection (an IRS revenue officer), the agreement will not be an option for you.

3. Set up a payment plan

The most common option to choose from is to set up a payment plan for the outstanding balance. The two most popular agreements are the guaranteed installment agreement and the streamlined installment agreement.

These are popular because they are easy to enroll in, have fixed payment terms, and you avoid a tax lien if you set the agreement up on time.

If you owe $10,000 or less, a guaranteed installment agreement allows you to pay over 36 months. This option is only available if you haven’t been in a payment plan during the last five years. You can request this payment plan when filing your return by attaching Form 9465, by calling the IRS directly, or by using the IRS online payment agreement tool.

The streamlined installment agreement, on the other hand, allows you to pay within 72 months if you owe at least $50,000. If you have less than 72 months left on a 10-year IRS collection statute of limitations, you must pay within the shorter statute of limitations period. This option can be set up for a tax balance over one year or multiple years. Again, you can go online, contact the IRS directly, or mail in Form 9465 to get setup on this payment plan.

Another payment option for you is a full-pay non-streamlined installment agreement if you owe up to $250,000. The collection statute of limitations is 10 years from the date of your taxes being assessed. This option can only be set up by contacting the IRS Collection department They will provide what your minimum monthly payment will be in order to be approved this agreement. To make payments, you can either set up direct debit using IRS Form 433D or by mailing a check every month.

If you are a taxpayer that doesn’t meet the requirements for the above agreements and you owe more than $250,000, you may need an ability-to-pay payment plan. This can be a complicated option as the IRS will need to determine what you can pay. Their goal is to allow you enough money to pay for your living expenses and then send any remaining funds to the IRS to take care of your debt. Your assets, expenses, income, and personal circumstances will be used to determine your ability to pay. The IRS may even ask to sell or borrow against current assets such as retirement or savings accounts.

4. Temporary hardship status or currently not collectible

This option is very similar to an ability-to-pay plan. The only difference is that this analysis of your finances shows that you have no ability to pay. If this is the case, you will be put on a non-collectible status. This status is only temporary and will be reviewed yearly by the IRS.

5. Settle the debt with an offer in compromise

Lastly, you have the option to settle your debt with the IRS through compromise. This option does have many requirements to meet in order to qualify. The application for this option is expensive and is time consuming.

The application fee is currently $205 and payment may be required during the application consideration period which can take up to 12 months to complete. The acceptance rate is generally one in three because most individuals do not meet the lengthy requirements or are unable to pay the offer amount to the IRS.

Although it can be stressful when you receive a balance-due notification from the IRS, you can find comfort in knowing that you have multiple payment options to choose from. If you do not know which payment option is best for you, contact your CPA as they can help guide you in making the best informed decision.