CHAPTER 7: UNDERSTANDING IRS COLLECTIONS AND THE RESOLUTION PROCESS
The 941-tax resolution process is remarkably like the 1040 (individual) tax resolution process; however, its unique in that 941’s have to be filed quarterly, and therefore taxes, penalty, and interest will start to compound each quarter.
Before we jump into the tax resolution process, let us start with the IRS Notice Cycle.
Collections Starts with A Tax Deficiency
There are three ways that most tax liabilities come about:
- When the business files a tax return with a balance due on it. If that balance due is not paid accordingly, then a tax debt arises and will be assessed.
- When the business does not file a return, the IRS can create a Substitute for Return (SFR). They will use information they have on the account to file a return on behalf of the business. This tax return will assume the worst-case scenario and will not include deductions, exemptions, credits, and so forth that the business might have been eligible for had the business filed themselves. With the SFR filed, an assessment can then be made.
- Lastly, an assessment can come out of an examination. After an examination, the IRS may determine an accumulation of tax debt and therefore start this cycle.
The assessment I keep talking about is a tax increase that posts to the taxpayer account. These assessments may be the result of:
- Original returns
- Amended returns
- Math errors on returns
- Substitute for Returns (SFR)
- Claims for credit, refund, or abatement
- Tax Audits (Exam)
Regardless how the assessment was created, a tax deficiency gets created and the cycle begins!
The Never-Ending Cycle
After an assessment has been made by one of those three avenues above, a specific notice cycle is initiated by the IRS. This cycle can become a perpetual, never ending cycle if the business continues to accrue additional liabilities each quarter (what we call pyramiding) because the actual IRS notice cycle is about four months long. By the time this cycle wraps up, the next quarter has already begun. In other words, there is no time lag between the accumulation of tax debt and the cycle of notices.
Breaking the cycle below is the key to resolution:
- Statutory Notice of Deficiency (SNOD) – Bill 1 & Bill 2
- Notice of Federal Tax Lien Filing (NFTL)
- Notice of Intent to Levy (CP-504)
- Final Notice of Intent to Levy (Letter 1058)
You cannot get into any agreements or resolution with the IRS until the business breaks this cycle. And the cycle repeats itself any time you incur a new tax liability.
Bill #1 & Bill #2 – SNOD
The IRS does not start collections activity against a business simply because you file a tax return with a balance due and do not pay it. IN fact, the collections process really does not even start when the tax assessment is made.
In all reality, the IRS collections process begins with a letter called the Statutory Notice of Deficiency (SNOD). This is also known as the “21-day letter”. This letter is kicked out by a computer automatically when you “number comes up”. This can be substantially after your tax return was filed.
For businesses that are behind on payroll taxes, I have seen cases where it takes an entire year before the IRS kicks out the SNOD. This delay has been one of the primary things reported by the Taxpayer Advocate to Congress as a major problem within the IRS.
The SNOD is referred to as the 21-day letter because it gives you 21 days in which to pay the tax before additional penalties and interest will accrue on the tax liability. Nothing “bad” is going to happen to the business during this 21-day letter.
You can view it as a grace period to pay within 21 days to avoid further penalties and interest.
This is a bill!
There are several common notices within this bill, most starting with the letters “CP – ___”. These CP codes are computer generated. If you get a Letter 2257C or 3030C, this is a letter from a human being making an adjustment or assessment. There are other bill types, but these are some of the most common.
Again, 21 days to pay and avoid further penalties and interest.
Bill #2 is typically sent out to further get the business to pay. It is not required by law that a second bill is sent out, but the IRS usually does.
Notice of Federal Tax Lien Filing (Form 668-Y)
Under Federal law (not policy procedures or the internal revenue manual), a statutory tax lien arises automatically 10-days after the notice of demand for payment (the 21-day letter) goes unpaid. After being unpaid for 10 days, a notice of federal tax lien automatically gets created and a “silent” lien will get initiated.
Even if you owe $5 and no notice of federal tax lien gets filed publicly, there is a general tax lien on hold within your file.
The 668-Y is a public notice that gets filed with the state or county clerk. This is just the public record filing. But regardless if a public record gets filed or not, there is already a federal tax lien in place.
This lien filing will give the federal government the right to any property or newly purchased property within a business. The number of liens being filed publicly has cut by 1/3 over the last several years, but this does not mean a lien does not exist.
The positive aspect to a 668-Y filing, is that it comes with an Appeal option (which is great).
Notice of Intent to Levy (Form Letter CP-504)
Approximately 30 days after the 668-Y goes out, the Notice of Intent to Levy (Form Letter CP-504) will be sent. This is the notice that the federal government is letting you know that they can seize state tax refunds (specifically) and has the intent to levy other assets. Side note, this is the only notice the government is required to send regarding the seizure of any state refunds.
Unfortunately, there are no Appeals rights attached to this notice, but it is another opportunity for the business to satisfy the debt.
Final Notice of Intent to Levy (Letter 1058)
Exactly 30 days after a CP-504 is issued, you are going to receive the Letter 1058. If it is a Letter 1058, that means it came from a Revenue Officer out in the field. If it comes from ASC, it is called an LT 11, but is pretty much the exact same letter.
The Internal Revenue Code requires that the IRS send a notice of intent to everyone before they actually do. What they could do is meet this requirement with the CP-504 that went out 30 days before this letter gets to you. Instead, they give you two opportunities for you to know that they can levy you. The CP-504 is basically the courtesy. The 1058 has real teeth and will be sent 30 days after the CP-504. The IRS can then commence with levy action 30 days later (assets, bank accounts, etc.). That is when all the bad stuff starts to happen.
This is the letter that contains Collection Due Process Appeal rights. I believe the CDP Appeals group will be your best friend. They have more authority, more experience, less emotional involvement in your case and are more rational because they are not out in the field. Appeals are great folks to work with and you should kick things to Appeals when and if you can. You have 30 days after this letter to file the Appeals.
How to Break the Cycle?
As you can see, this cycle can really be a beast for businesses. The cycle takes about four months, by which time the 941 for the next quarter should have already been filed and if not filed or paid, the cycle starts up again for that specific quarter.
It is not uncommon for those that come to us for help to have four or more cycles of notices that are ongoing. It gets messy and hectic and stressful.
But in order to remove that stress, you need to break the cycle. Here is how you do that:
1. Ask the IRS for a Temporary Collections Hold
Ask the IRS for a temporary collection hold for 120 days. If they do not give that to you, you will likely end up with a 30 – 60 days window in which to get everything filed, bookkeeping done, etc. You do not want to get levied while you are honest to goodness trying to fix everything, so start by admitting you are ready to get current and compliant and ask for some time.
2. Get Current with the Federal Tax Deposit Payments
Current means that you start today to never miss another payment. Pay the most recent federal tax deposit payment amount for the most recent payroll. If you are not using a payroll service already, this is where I recommend that you do so, to force yourself into a situation where they will pay it for you. By doing this, you will stop pyramiding liabilities.
3. Get compliant with Filing Requirements
In the 941 filing world, getting compliant with filing requirements means that you need to file every single 941 that should have been filed. This can be extensive depending on how long this has been going on, but you must do it in order to get into resolution.
4. Seek Resolution
By asking for a temporary hold to get your affairs in order, and by getting current and compliant with tax deposits and filings, you can finally seek resolution on what has occurred.
The resolution process is a standard, step-by-step process, which we will talk about over the next two chapters.