The IRS has automated notice streams that provide a series of notices that are used in most of the major compliance enforcement activities. These notices provide for the sequence and timing of enforcement actions. Some notices provide appeal rights that may be critical to resolving the tax issue.
Tuesday, January 12, 2021
UNDERSTANDING YOUR IRS TAX DEBT NOTICE
IRS BACK TAX AUDITS
Audit notice stream: it begins with a notification to the taxpayer of an audit and concludes with the tax being assessed (if any). The notice stream provides for critical appeal rights when the IRS auditor proposes an adjustment to the return (called a 30-day letter). Here is the normal notice stream for audits:
Audit notification letter – Letter 566/566-S or Notice CP 75 (mail audits), Letter 2205/3253 (office/field audits): this letter notifies the taxpayer of the years and forms under audit and the audit issues.
30-day letter – Letter 525: this letter provides the taxpayer 30-days to appeal the determination with the IRS Independent Office of Appeals.
90-day letter (Statutory Notice of Deficiency) – Letter 3219: this letter starts the taxpayer’s 90-day deadline to appeal the determination with the US Tax Court.
Tax assessment notice – Letter CP22E: this letter notifies the taxpayer that the tax, penalties, and interest have been assessed.
No change letter – Letter 590: if the audit concludes with the IRS accepting the return as filed, the taxpayer will receive a no-change letter indicating the conclusion of the audit.
CP2000 Underreporter notice stream: underreporter inquiries often begin with the CP2000 notice. However, in certain circumstances, this notice stream can begin with a CP2501 (for example, high underreporting from substantial stock sales or income from a partnership/S corporation). Here is the normal notice stream for underreporter inquiries:
Underreporter inquiry and proposed adjustment notice – Letter CP2000: this notice provides the analysis of the IRS matching of information returns (Forms W-2, 1099, etc.) with your return and shows the omitted items. The notice proposes additional taxes (and potentially penalties) and provides the taxpayer 30-days to respond. If the taxpayer does not respond, this letter serves as the taxpayer’s 30-day letter.
Letter considering taxpayer’s response – Letter CP2000 (recomputed) or Letter 2625/2626/2627/1802C: recomputes tax and/or penalties based on the taxpayer’s response to the original CP2000 notice. Taxpayer has 30-days to respond. This letter also serves as a 30-day letter (i.e. 30-days to request an appeal).
90-day letter (Statutory Notice of Deficiency) – Letter CP 3219: this letter starts the taxpayer’s 90-day deadline to appeal the determination with the US Tax Court.
No change letter – Letter CP 2005: if the audit concludes with the IRS accepting the return as filed, the taxpayer will receive a no-change letter indicating the conclusion of the underreporter inquiry.
Collection notice stream: the collection notice stream starts with the assessment of the tax (CP 14 for a filed return with a balance owed) and concludes with a Final Notice of Intent to Levy (usually IRS notice LT11 or L1058). The collection notice stream is usually 5 IRS notices, but the IRS can omit the 2nd and 3rd notice if the taxpayer has other issues (i.e. owes for other years, has unfiled returns). The full 5 notice collection notice stream for a balance due filer who does not pay:
Balance due notice – Letter CP 14: notifies the taxpayer that the tax has been assessed and the balance owed.
Balance due – 1st reminder notice – Letter CP 501: payment has not been received and the taxpayer is requested to pay.
Balance due – 2nd reminder notice – Letter CP 503: payment has not been received and the taxpayer is again requested to pay.
Intent to levy notice – Letter CP 504: payment has not been received and the taxpayer is again requested to pay.
Final notice of intent to levy – Letter LT11 or L1058: the taxpayer is notified that the IRS will garnish wages or levy other sources of income/assets if the taxpayer does not pay or enter into a collection alternative. This is usually the last notice before a levy is issued. It also provides the taxpayer an opportunity for a Collection Due Process hearing to appeal any collection alternative disagreement or to contest the tax and/or penalties assessed.
Notice of Federal Tax Lien (Letter 3172) and Passport Restrictions (CP 508): IRS tax lien filings usually occur if the taxpayer does not respond during the collection notice stream. Also, if the taxpayer does not enter into an agreement to get in good standing and owes more than $53,000 (adjusted annually), the IRS can start passport restrictions by certifying the amount owed as “seriously delinquent tax debt.” This certification notifies the State Department who can restrict the use of the taxpayer’s passport for travel.
UNFILED TAX RETURNS
Delinquent return notice stream: if a taxpayer does not file a required return, the IRS may request the taxpayer to file. IF the taxpayer does not file, the IRS can proceed with a delinquent return investigation and ultimately file a return for the taxpayer if the taxpayer refuses to file (called a substitute for return). The typical delinquent return notice stream:
Request for return – Letter CP 59: after the return due date has passed, the IRS may send a request to file. If you do not file or respond with a reason that you are not required to file (or have filed already), the IRS may proceed to the next letter and a delinquent return investigation.
Request for return – 2nd reminder notice (optional) – Letter CP 516: this optional letter may be sent as another reminder to file.
Request for return – Final notice – Letter CP 518: this is a final warning before the IRS proceeds to file a return for you (called a substitute for return).
Substitute for return proposed assessment – Letter 2566: this letter proposes additional taxes and penalties owed as a result of the IRS filing a return for the taxpayer. The taxpayer can appeal the decision within 30 days.
90-day letter (Statutory Notice of Deficiency) – Letter CP 3219: this letter is your final letter to appeal the substitute for return filing before the tax is assessed. Taxpayers must appeal to the US Tax Court to contest the return filing.
Tax assessed – Letter CP 22: the IRS has assessed the tax, penalties, and interest due from the SFR.
Taxpayers can file an original return at any time during this process and the delinquent return investigation notices will terminate.
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