What to do when the IRS balance-due notice arrives

June 20, 2022 9:10 AM

Much has been publicized about the IRS pausing some of its compliance and collection notices in 2022. Specifically, the IRS announced that it would suppress many balance-due reminder notices until the IRS caught up on processing paper returns, correspondence, and other backlogged items.

But tax professionals and their clients shouldn’t get too comfortable. The IRS can’t suppress about 9 million notices that go out every year. These notices are the first balance-due notice in a series of collection notices. In IRS terms, this notice is called the CP14 notice and demand for tax.

The CP14 notice is required by law (Internal Revenue Code Section 6303) to be issued within 60 days after the IRS assesses the tax. The bulk of CP14 notices show up in the beginning of June (for 2021 returns, this date was likely June 6, 2022), asking for payment within 21 days.

This notice and demand letter sets the stage for the IRS to enforce collection. If the taxpayer doesn’t respond to the CP14 notice with payment, the IRS can begin the process to collect the taxes by levy or by filing a notice of federal tax lien. Usually, the IRS will send a series of reminder notices, called the collection notice stream, to ask for payment before starting enforced collection.

What should you do if your client gets a CP14 notice?

First, don’t ignore it. It is time to start planning with your client on how to resolve the outstanding tax balance. There are five IRS options to consider, and they each have pros and cons. Your client’s circumstances will determine which option is best.

Option 1: Pay the entire tax balance

The easiest option is to pay in full. Often, the decision to pay rests on the taxpayer’s finances and the cost of other alternatives to full payment. The cost of not paying in full is the 4% current interest rate (adjusted quarterly by the IRS and scheduled to rise to 5% on July 1) and the 0.5% failure to pay penalty each month on the tax balance. Roughly, that equates to a 10% added cost every year if the taxpayer doesn’t pay.

If your client wants to pay in full, the payoff amount is on the CP14 notice. Paying is easy if your client uses the IRS Direct Pay option at IRS.gov. If your client pays another way, carefully monitor the status of the payment at the IRS because of processing delays. The IRS is taking two to three weeks to process checks.

If your client can’t pay by the due date on the notice, you will need to contact the IRS or have your client log in to their online account to get the current balance they owe.

Option 2: Get an extension to pay

Sign in front of IRS building in Washington, D.C.

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Some taxpayers just need more time to get the funds together to pay the IRS. For them, the best option may be to get an extension-to-pay agreement with the IRS. The IRS allows an extension of up to 180 days, which it calls a short-term payment agreement.

Taxpayers or their tax pros can use the online IRS payment agreement tool to request this extension if they owe less than $100,000. Or they can call the service to secure this agreement.

The IRS will send a letter confirming the 180-day extension, along with the payoff amount at the 180-day date. Taxpayers can make payments during the 180-day extension period or wait until the end of the 180 days to pay. If taxpayers can’t pay the entire balance before the end of the 180 days, they can contact the IRS to set up a different option for the remaining balance, such as a payment plan.

Good news: There is no fee to set up an ETP agreement, and taxpayers can avoid a notice of federal tax lien.

There is one catch to the ETP agreement: If your client gets assigned to local field collection (an IRS revenue officer), the ETP is not an option.

Option 3A: Set up a simplified payment plan with the IRS

An IRS office building in the East Harlem neighborhood of New York

Timothy Fadek/Bloomberg

The most common option taxpayers select is the IRS payment plan. The IRS term for a payment plan is an installment agreement. In 2021, almost 4 million taxpayers were in a payment plan.

There are several types of payment plans. The two most common are the guaranteed installment agreement and the streamlined installment agreement. These two agreements are popular because they are easy to get, have fixed payment terms, and avoid a tax lien if taxpayers set them up on time (before the lien is filed).

Guaranteed installment agreement. The GIA is automatic if the taxpayer meets the conditions. The GIA allows taxpayers who owe up to $10,000 to pay over 36 months. As with all payment plans, taxpayers must file all required tax returns. The GIA is open only to taxpayers who haven’t been in a payment plan during the past five years. Taxpayers can set up a GIA when filing their return (by attaching Form 9465), using the IRS online payment agreement tool, or by calling the service directly. GIAs are common when a taxpayer files their return, is surprised that they owe, and immediately attaches the payment plan request to their return to set up the agreement.
Streamlined installment agreement. The SLIA is another common payment plan. It allows people who owe up to $50,000 to pay within 72 months. If the taxpayer has less than 72 months left on their 10-year IRS collection statute of limitations, the taxpayer must pay within the shorter statute of limitations period. Taxpayers can set up a SLIA for a tax balance on one year or multiple years. If the taxpayer owes between $25,000 and $50,000, they must set up the agreement to make automatic payments (likely by a direct debit from their bank account). Taxpayers can set up a SLIA online, by phone, or by mail using IRS Form 9465.

All IRS payment plans have set-up fees ranging from $31 to $225, depending on the set-up method. For the lowest set-up fee for a GIA or SLIA, taxpayers should set up the agreement online and pay by direct debit from a bank account. Low-income taxpayers may have no fee or a reduced fee, depending on how they set up their agreement.

Option 3B: Set up a full-pay non-streamlined payment plan

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The IRS introduced this payment plan in 2020. In the full-pay non-streamlined installment agreement, taxpayers can owe up to $250,000 and make payments until the end of their collection statute of limitations expiration date. The collection statute of limitations is 10 years from the date the IRS assessed the tax. So, a 2021 tax filer can set up payments for the full 10 years left on the statute to collect.

Taxpayers must set up the NSIA by phone with IRS Collection. The IRS will provide the taxpayer’s minimum monthly payment to get this agreement. After the taxpayer sets up the agreement by phone, the service will send a letter confirming the agreement. The taxpayer can set up direct debit payments using IRS Form 433D or pay by check every month.

There is another important condition of the full-pay NSIA: If the taxpayer owes more than $10,000, the IRS will likely file a tax lien when the taxpayer sets up the agreement. For this reason, many taxpayers pay their tax bill to under $50,000 and set up a SLIA to avoid the tax lien. For taxpayers who owe between $50,000 and $250,000, the full-pay NSIA can be an attractive option. It’s easy to set up, can offer the most favorable payment terms, and avoids most of the paperwork involved with more complex agreements.

Option 3C: Get an ability-to-pay payment plan

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If taxpayers can’t meet the terms for a GIA, SLIA, or full-pay NSIA, or if they owe more than $250,000, they may need to set up a payment plan based on their ability to pay the IRS.

IRS collection agreements get complicated when they involve determining a taxpayer’s ability to pay. The IRS goal is to allow the taxpayer enough money to pay their living expenses — and to send all their remaining funds to the IRS to pay their outstanding tax debt.

With ability-to-pay agreements, the IRS reviews the taxpayer’s assets, income, expenses, and personal circumstances to determine their ability to pay. Taxpayers will have to provide collection information statements (IRS Form 433 series) and supporting evidence to prove their ability to pay.

The IRS may ask the taxpayer to sell or borrow against assets that the taxpayer doesn’t use to produce income or to support the health and welfare of their family. For example, the IRS may ask the taxpayer to pay their tax bill with retirement funds, savings, or by selling recreational assets.

The IRS will also figure out the taxpayer’s average monthly disposable income to calculate monthly payments. In determining MDI, the IRS will look closely at the taxpayer's income and living expenses. The service can be stingy about allowed expenses when it computes MDI. These calculations can be complicated, and often, a tax pro can help taxpayers decipher the many IRS rules for determining ability-to-pay agreements.

Once the IRS establishes a taxpayer’s ability to pay, the taxpayer’s best option may indeed be to get an ability-to-pay agreement. In some cases, the SLIA or full-pay NSIA terms may be better, and the taxpayer can go with one of these agreements instead. In ability-to-pay plans, if the taxpayer owes more than $10,000, the IRS will generally file a tax lien as part of the agreement terms.

Option 4: Temporary hardship status, or currently not collectible

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Currently-not-collectible status is similar to an ability-to-pay plan, with one exception: The analysis of the taxpayer’s finances shows that they have no ability to pay. In these cases, the taxpayer will be put into a temporary non-collectible status that will pause IRS collection on their tax bill. As of the end of 2021, over 616,000 taxpayers with outstanding debts were in CNC status because of financial hardship.

Taxpayers requesting CNC status have to disclose the same financial information as taxpayers requesting ability-to-pay plans. Unlike payment plans, there is no set-up fee for CNC status. However, taxpayers in CNC status who owe over $10,000 are likely to see an IRS tax lien.

CNC status is temporary, and the IRS reviews it every year. If the IRS finds that the taxpayer’s ability to pay has increased to more than their reported living expenses, the IRS may ask the taxpayer to prove their ability to pay. At this point, the taxpayer will have to renegotiate the CNC status or select another appropriate agreement. As with all IRS collection agreements, including CNC status, the service takes a taxpayer’s refund until their tax balance is paid off or the collection statute of limitations expires.

Option 5: Settle the debt with an offer in compromise

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The last IRS tax debt option is settlement, referred to as an offer in compromise. The OIC computation is similar to ability-to-pay plans and CNC status, except that the ability-to-pay determination concludes that the taxpayer does not and will not have enough money to pay the IRS before the statute of limitations to collect expires.

OICs have many more terms and requirements to qualify and determine how the IRS will accept a settlement. In short, it is advanced calculus.

Taxpayers are often drawn to asking their tax pros about the OIC. It’s overpublicized as a common tax debt option. In 2021, only 14,462 taxpayers got an OIC — about one out of every 1,500 tax debtors.

Like most IRS collection agreements, the OIC is computational in nature. To qualify for an OIC, the taxpayer must not be able to pay the IRS with their equity in assets and future monthly payments before the IRS collection statute of limitations expires. If the taxpayer qualifies, they must then figure out how much they need to offer the IRS to settle the tax debt. This is called the offer amount.

Taxpayers are often misled that the offer amount is arbitrary in nature. These calculations involve complex rules often left to experienced tax pros. The OIC is not the right option for most people with tax debt, and they will need to evaluate payment plans or CNC status as a more viable alternative.

OIC applications can be expensive to submit and take time to finalize. OICs have a $205 application fee, may require payments during the application consideration period, and take eight to 12 months to complete. The traditional acceptance rate is about one in three, largely because taxpayers don’t qualify or can’t pay the offer amount to the IRS.

If successful, OICs remove the tax debt and all tax liens filed. The taxpayer must meet all of the conditions of the OIC, which include filing and paying on time for the next five years. Those who fail this requirement face reinstatement of their tax debt — and reconsidering all options over again.

The moral here: Like most ability-to-pay options, taxpayers should save the OIC for the calculus teacher — the experienced tax pro who can advise on all options to consider, including the OIC.

A final word

Tax professionals often feel their clients’ stress when clients owe back taxes and can’t pay. However, your client is not alone. At last count in 2020, over 20 million taxpayers owed the IRS. The wrong answer is to avoid the CP14 notice — or any IRS collection notice. The right answer is to get into the appropriate agreement with the IRS based on the client’s circumstances. Getting into an agreement will avoid levies and passport restrictions. Getting into the right agreement can also avoid a tax lien.

At the end of the payment plan, there may also be a bright spot. If your client has a clean compliance history for the three years before the payment plan year, they may qualify for first-time penalty abatement. First-time penalty abatement can wipe out previous failure to pay penalties and cut the cost of the payment plan.

Preventing future tax debts is also key to getting clients back on the right path. If clients end up owing taxes again and can’t pay, they risk defaulting on any IRS agreement, including payment plans, CNC status, and the OIC. Addressing the source of the debt and/or adjusting payments to the IRS (withholding or estimated tax payments) is the key to stopping future debt.