IRS collection notices are coming back

For the most part, the Internal Revenue Service has been on hold with its automated collection activity since the beginning of the COVID-19 pandemic in March 2020. There have been brief periods of IRS notices and enforcement to tax debtors in late 2023 for 2022 tax year balances, but for the most part, IRS collection enforcement has been limited to its field collection resources — its revenue officers – to collect on the most egregious of accounts.

Enter 2024 — and the IRS is about to get back to normal collection activity through its primary collection engine: the Automated Collection System, or ACS. On Dec. 19, 2023, the IRS announced that it would resume collection notice activity, and subsequent collection enforcement, on years prior to the 2022 tax year. 

The IRS collection notice stream

Most collection is done through automated notices. The IRS uses a progression of letters to taxpayers to collect on back tax debt balances. These notices are issued by the ACS and are referred to as the “collection notice stream.” The first notice is required by law and must be issued to a taxpayer within 60 days of when the tax is assessed. This notice is called the CP14, “Balance Due.” Taxpayers who file by the initial April 15 due date and do not pay their tax bill will usually see this notice in the first week of June, before the required 60-day required time limit to send the notice. 

Even during the pandemic, the IRS was required by law to send CP14 notices to taxpayers. In 2022, it sent 9.4 million CP14s to taxpayers. In 2023, it sent almost 12.2 million CP14s — a 30% increase from 2022 — to individual taxpayers who could not pay their tax bill with their filed tax return.

Taxpayers who do not pay the amount owed on the CP14 notice will then start to receive a series of notices before the IRS “enforces” collection through actions such as liens, levies and passport restrictions. The next notice is the CP501, “Reminder Notice,” followed by a CP503, “2nd Reminder Notice,” which normally arrives about five weeks after the CP501 notice. 

If the taxpayer still does not pay or enter into a collection agreement with the IRS (such as a payment plan, extension to pay, or a hardship status such as not collectible status or filing an offer in compromise), the IRS can send a CP504 notice about five weeks later. The CP504 notice is a notice of intent to levy and puts the taxpayer on notice that the IRS can levy certain payments. It also triggers the IRS’s ability to take their state income tax refund to pay their back tax bill.

If the taxpayer still does not pay or enter into an agreement with the IRS on the balances owed, the account can proceed to collection enforcement. The taxpayer’s delinquent account can be assigned for collection to the ACS or to field collection (i.e., the local IRS revenue officer). 

It is most common for a delinquent tax debtor to be assigned to the ACS. When assigned to ACS, taxpayers can receive a Letter LT11, “Final Notice of Intent to Levy,” putting them on notice that the IRS will attempt to garnish wages or levy bank accounts or other income in 30 days. If assigned to IRS field collection, contact would be made directly by a revenue officer, who would attempt to collect the back taxes directly from the taxpayer through their assets and/or income.

In some circumstances, the IRS may decide not to enforce the balance owed. From 2020-2023, it was common for the agency to make the decision not to enforce as ACS actions were mostly put on hold. The IRS had very little collection activity in 2020 and 2021, and formally put a moratorium on its automated collection actions in February 2022. Some taxpayers, mainly those with higher tax debt balances, payroll tax debtors and business taxpayers experienced the more intrusive IRS Field collection enforcement. 

However, for the most part, IRS collection notices remained low or nonexistent during the pandemic due to limited ACS activity:

IRS collection enforcement activity

The resumption of collection notices will also mean more IRS collection enforcement actions. Collection enforcement is mostly tax liens and levies. In very rare circumstances, the IRS may seize a taxpayer’s assets. 

All enforcement actions have been on a steady decline over the past decade, largely due to reduced IRS collection enforcement resources. During the pandemic, most tax lien and levy activity only occurred as a result of field collection enforcement or when taxpayers who entered into collection agreements with the IRS that required a lien determination. 

Passport restrictions have been limited as well. The IRS can certify that a taxpayer has “seriously delinquent tax debt” if the taxpayer has an assessed balance of $62,000 or greater (2024 amounts, indexed each year for inflation) and is not in an agreement on their balances owed with the IRS. Once certified as having SDTD, the IRS sends Letter CP508C, “SDTD Certification,” to the taxpayer and to the State Department for potential passport restrictions. 

To certify a taxpayer as having SDTD, the taxpayer must have received a tax lien or levy from the IRS. Without liens or levies, IRS issuances of CP508Cs have dropped considerably, from over 100,000 in 2021 to just below 60,000 in 2023.

Resumption of IRS collection

The Dec. 19 announcement put taxpayers and their professionals on notice that the IRS will resume collection notices and enforcement on years prior to 2022. On Jan. 30, 2024, IRS officials provided some details on how the agency plans to restart collection notices and enforcement.

Taxpayers who owe for 2021 and earlier years and are assigned to the Automated Collection System will receive IRS letter LT38, “Reminder – Notice Resumption.” This notice informs the taxpayer that the IRS will begin collection actions if they do not enter into an agreement or pay their balances owed. These notices started going out to individual and business taxpayers in January 2024. Not all taxpayers will receive these initial notices, as the IRS is gradually ramping up its collection efforts after years of inactivity.

After the LT38 notice, if the taxpayer does not pay or make arrangements to pay, the IRS will continue to collect by issuing the progression of collection notices and, ultimately, enforcement actions on many of these taxpayers. 

The next notice, the CP501 notice, will occur five weeks after the LT38 notice if payment or payment arrangements are not made. As part of the notice resumption, the IRS will now extend the time period between CP501, CP503 and CP504 notices. In past years, these notices were sent about five weeks apart. Now, the IRS will give taxpayers and their tax professionals more time between notices and allow eight weeks between the CP501-CP504 series notices. 

Heavy lifting ahead for the IRS — and for taxpayers who owe

Less IRS tax debt enforcement has had an impact on tax collection. The number of tax debtors has been steadily growing in recent years. As of Sept. 30, 2023, over 24 million individual and business taxpayers now owe back taxes, and the number of tax debtors has grown by almost 4 million since the beginning of the pandemic:

The IRS’s big problem is that very few taxpayers are in an agreement to pay their back balances. As of the end of 2022, out of the 24 million individuals and businesses who owed, only 4.2 million or 17.5% of taxpayers were in an agreement on their back balances owed, leaving 19.8 million who are not in any agreement at all.

To make matters worse, an increasing number of taxpayers are filing and owing the IRS. In tax season 2023, as of Sept. 30, 2023, the IRS saw a 10% increase in the number of taxpayers who filed with a balance due. Those who cannot pay start the collection notice stream and may be added to the increasing numbers of those who owe.

The answer for millions of taxpayers is to get right with the IRS. Taxpayers will need to pay the agency or enter into one of the collection agreements with the IRS to avoid enforcement. Most taxpayers select a payment plan (“installment agreement”). However, taxpayers in financial hardship can provide financial information to the IRS proving their inability to pay and qualify to become one of the few in not collectible status or in a settlement through the offer-in-compromise program.

As IRS enforcement restarts, inaction may leave the millions who owe and are not in an agreement with an unwanted outcome: IRS enforcement through liens, levies and passport restrictions.