In the perspective of Advocate Shahid (Tax Compliance and Advisory Specialist). When you ignore an IRS notice, there is a series of ramifications. It starts with fines, penalties and interest and moves all the way to more aggressive collection methods like wage garnishment, bank levies and finally, the IRS stripping away your appeal rights.
The IRS has a procedure for collecting taxes that follows certain and predictable steps:
- Late Payment and Failure-to-File Penalties: As the balance due increases, so do the late payment and failure-to-file penalties. Daily interest may be compounded with escalating penalties for ignoring the balance due and causing late payment and failure-to-file penalties to pile up on the debt.
- When the notice is an audit notice or it provides an opportunity to change information on the return, not responding leaves the IRS to make random changes. They will not let you take your deductions and you’ll end up paying a lot more in taxes.
- Notice of Federal Tax Lien: IRS can place a “Federal Tax Lien” (a legal claim against your property). That will have a negative impact on your credit and that will make it more difficult to sell or refinance property.
Repeated Notice CP504 and/or Letter 1058 Violation = Level & Seizure. The IRS can also remove funds from your paycheck, your bank account and your property. - Appeals must be filed within 30-days of the notice, 90-days of the Tax Court window, or 140-days of IRS’ decision, if the appeal is filed with the Tax Court. Notices: Appeals must be filed within 30 days of the notice, 90 days of the Tax Court window or 140 days of the IRS’ decision when appealing to Tax Court within the 30-day notice window and 90-day Tax Court window.
What Is an IRS Notice or Letter?
The IRS Notice (or IRS letter) is a formal communication from the Internal Revenue Service regarding your taxpayer account, tax return, payment, refund, correction or missing information. In layman’s terms, a Federal Tax Notice is an IRS message regarding an issue for which you need to take action.
Not all IRS letters are bills from the IRS. Some notices cover one of the following: tax return changes, adjustments to refunds, identity verification, missing returns, underreported income or an IRS information request. A bill typically indicates that the IRS thinks you owe a balance, and an IRS account correction notice will only inform you of a change that took place to your account.
Most notices have a notice number (e.g. CP notice number or LTR number) which is typically displayed in the top/right of the notice. That number is to help taxpayers look up an explanation of the notice on the IRS’ website. The letter will also indicate the year of tax, what has changed in the tax situation, what the IRS desires, the deadline for the IRS’ response, and what actions can be taken if one agrees or disagrees.
What Happens If You Ignore an IRS Notice?
Short answer: Failure to comply with an IRS notice could result in further penalties and interest being added to your tax liability, the IRS issuing more dire collection letters, a reduction or denial of your tax refund, the IRS filing a federal tax lien, the IRS issuing a tax levy, the IRS garnishing your wages or seizing funds from your checking or savings account, and the IRS denying your appeal. The outcome will vary based on the kind of notice, the amount in debt, and failing to make it to a legal deadline.
Most of the largest consequences for not responding to IRS notices start when a person fails to take action following an IRS letter regarding an unpaid balance, missed tax return, proposed change or collection action problem. When a notice from the IRS is not answered, the IRS might proceed from reminders to formal IRS collection action.
For instance, IRS rules unpaid balance notices can result in more penalties and interest, a Notice of Federal Tax Lien, and in extreme cases, levy action on income, bank accounts, state refunds or property.
If you do not reply to an IRS notice, then the consequences of your inaction will depend on the notice. Failure to pay as noted in a missed payment notice could result in IRS letter consequences (penalties, collection notices, etc.). Missed IRS deadline consequences for appeal notices may limit your ability to appeal the IRS position.
IRS Penalties and Interest Can Increase
Failure to respond to an IRS notice could result in the tax debt increasing. If the amount you owe the IRS isn’t paid, the IRS can tack on a failure to pay penalty, failure to file penalty, late payment penalty, and continuous interest penalties. The unpaid balance, says the IRS, is subject to daily compounding interest, and a late-payment fee may apply each month until the tax is paid, but not exceeding the legal limit.
Example: A Small Balance Becomes a Bigger Tax Debt
Suppose that $1,000 in small savings becomes tax debt of $5,000.Suppose the small savings amount to $1,000 which turns into a big tax debt of $5,000.
An IRS balance due notice is sent to a taxpayer for $2,400 and the individual fails to pay for a few months. The amount that has been frozen is not preserved. In response to the increase in violations for failure to act on the notice, IRS penalties for failure to act on notice and IRS interest after notice continue to increase. The next notice will reflect a higher amount due as unpaid taxes accumulate as the IRS notice is ignored.
You May Lose Important Appeal Rights
Failure to comply with an IRS notice may be costly. Failure to meet the IRS response deadline, appeal deadline or dispute deadline in the letter you receive may also result in the loss of IRS appeal rights. This can be a significant issue in the case of a Notice of Deficiency (CP3219A, CP3219N, or a Collection Due Process hearing).
The typical CP3219N Notice of Deficiency provides taxpayers 90 days from the date of the notice to file a tax court petition, but 150 days if the taxpayer is not in the U.S. Additionally, the IRS advises filing a return after receiving a Notice of Deficiency will not extend the deadline for the Tax Court.
Real Case Law: Boechler, P.C. v. Commissioner
In Boechler, P.C. v. Commissioner, the U.S. Supreme Court ruled that the 30-day time limit to file a petition with the Tax Court after the issuance of a Collection Due Process determination was nonjurisdictional, and thus might be subject to equitable tolling in certain situations.
But, the exceptions should not be used after the deadlines. When you are served with an IRS hearing notice or collection decision, it is important to take action before the deadline in order to preserve your rights.
The IRS Collection Process May Begin
The IRS collection process starts when you’re not paying the tax bill that you received from the IRS after ignoring it. The initial notice typically is a Notice and Demand for Payment, which details the amount of tax, penalties and interest owed.
If the balance is not paid, this initial IRS payment notice might be followed by an IRS collection notice like CP501, CP503 or CP504. The only difference between a CP501 and a CP503 is that the CP501 is a reminder of a balance and a CP503 is a second reminder for unpaid taxes.
A CP504 will be a more serious document as it is a Notice of Intent to Levy. Failure to comply with this IRS final notice could lead to IRS enforcement action such as levy action on income, bank accounts, state refunds or property.
Example Notice Flow
- IRS sends an IRS balance due notice.
- Taxpayer has no payment or reaction.
- Follow up collection notices are sent by IRS.
- An IRS final notice may be issued.
- IRS might proceed with a lien or levy.
There should be no excuse for neglecting an IRS unpaid tax notice; this could be a harbinger of collection action in the case of an IRS final notice ignored situation.
The IRS Can File a Federal Tax Lien
The IRS can take legal action to file a lien if taxes have not been paid and are not settled. IRS tax lien differs from IRS tax levy. A federal tax lien is the legal claim that the government has against property to collect taxes, and a federal levy is the act of the government to actually take the property in order to collect the taxes.
Notice of Federal Tax Lien is publicly issued to creditors to let them know that the IRS has a legal claim to your property. This may impact real estate, personal property, financial assets and property obtained subsequent to the lien’s date. It could also be a factor in obtaining credit, refinancing or selling property.
Real-Life Example
Self-employment taxpayer fails to pay from several IRS balance due notices. A Notice of Federal Tax Lien is filed by the IRS later on. The Lender checks the public records for the lien when the taxpayer attempts to refinance the business property. The lien is not removed because it has an unpaid tax status with the IRS and is not resolved.
That’s why it’s best to taxpayers to respond in a timely fashion, even if a payment plan is necessary, or to dispute the balance before it gets to lien enforcement.
The IRS Can Levy Wages, Bank Accounts, Refunds and Property
If you don’t respond to an IRS notice, you might face severe IRS action. The IRS can legally seize money or property through a tax levy to collect unpaid tax debt. This may include wages owed by the IRS, bank account levy, state tax refund levy, retirement accounts, commissions, vehicles, real estate and others.
In most cases, the IRS will only levy after evaluating the tax, issuing a Notice and Demand for Payment, the taxpayer will refuse or fail to pay the tax, and the IRS will issue a Final Notice of Intent to Levy at least 30 days prior to the levy. From then on, the IRS can take wages, bank account, or property.
Example: Ignored IRS Notice and Bank Levy
Because a taxpayer can’t afford to pay an IRS final notice is ignored. They don’t ask for a payment schedule, they do nothing. Later, a bank levy is issued by the IRS and the money is deducted from the account.
What If You Ignored the IRS Notice by Mistake?
An IRS letter is sometimes overlooked by a mistake. You might have been moved, missed the IRS deadline, forgotten to respond or you might never have received the IRS notice due to an old address. The IRS can still pursue penalties, interest, or collection measures even if the delay is considered to be inadvertent, so it’s best to take some action as soon as possible.
If You Moved and the Notice Went to an Old Address
If you moved and did not update the IRS or your address was not reflected on your IRS records, contact the IRS to update your address and verify your IRS records. Please note, that simply assuming that you have not received something will NOT automatically cancel the issue. You are required to respond and explain situation even though not quite as much.
If You Disagree With the IRS Notice
If the IRS notice is incorrect, follow the instructions on the IRS dispute form, collect documentation and submit a response before taking any other steps. The documents may be useful in showing the IRS that it is mistaken.
What to Do If You Already Ignored an IRS Notice
If you have previously disregarded a letter from the IRS, then do not wait for a subsequent letter. The first step to remedy an ignored IRS notice is to locate the initial notice, comprehend the problem and then get in touch with IRS before penalties, audit action or collection takes effect. Here’s what to do if you receive a notice from the Internal Revenue Service (IRS) step by step.
Step 1: Find the Notice and Read It Carefully
Begin from the top of the notice reading it word by word. Verify the notice number, tax year, payment/target due date, amount due, notice reason and payment/dispute instructions. The information, they are seeking; a tax adjustment; a demand for payment; and a warning of collection action.
Step 2: Check Whether the Notice Is Real
When transferring money or personal information, check to see if the notice is legitimate. To view your IRS online account, verify the notice number, view your tax transcript or call the IRS official phone number on IRS.gov. A tax consultant can also check the letter and determine if it is accurate with the IRS account record.
Step 3: Compare the Notice With Your Tax Return
Then compare the IRS notice with the tax return that you have filed. The missing income, underreported income, an incorrect 1099 or W-2, an IRS tax adjustment, a missing return issue, or a refund adjustment are all such reasons to look for. This will help you know whether to pay, argue with the IRS notice or ask for a change to it.
Step 4: Gather Documents
Gather evidence to support your argument. It can be a copy of your Income Tax Return, W2s, 1099s, bank statements, receipts, notes of payment, letters from the IRS, or other forms of identity theft documents if necessary. When it comes to proving that the IRS notice was incorrect, or that there is a right to appeal, good records will make it a little easier.
Step 5: Respond in Writing or Online If Allowed
Follow the directions for a response on the notice. Use the address that the IRS provided on the mail notice, make copies, not originals and retain a copy of your mail notice. Certified mail can be helpful if there is a deadline that is important. If the notice offers the IRS an upload facility, you might be able to upload documents online.
Step 6: Pay, Dispute, or Request a Payment Plan
Read the notice, and select the appropriate response. You can either pay it in full, or dispute the notice, request penalty abatement, appeal the notice, request reconsideration of the audit, request a Collection Due Process hearing, or attempt to stop IRS collection by using a payment option. When you can’t pay at once, depending on the amount owed and other factors, the IRS says that you may be able to get a short-term payment plan or an installment agreement. Other options could consist of an offer in compromise, or currently not collectible status.
Mistakes to Avoid After Receiving an IRS Notice
When it comes to IRS notice, it’s not always a problem but could be if you don’t handle it properly. Don’t make these common errors.
Mistake 1: Ignoring the Notice Because You Cannot Pay
There are many taxpayers who don’t have the cash to deal with an IRS notice. That is a mistake. The IRS will provide options for taxpayers who are eligible, like short-term payment plans and installment agreements.
Mistake 2: Missing the Appeal Deadline
The IRS may have a time limit for you to challenge or appeal a notice. Failure to file will result in the loss of important tax benefits and IRS will proceed with penalties, adjustments, liens or collection action.
Mistake 3: Calling Without Documents
Don’t call the IRS unprepared! Have the notice, tax return, W-2s, 1099s, payment information and supporting documents on hand to discuss your case.
Mistake 4: Assuming the IRS Is Always Correct
IRS notices may be due to a number of reasons, including a missing tax form, incorrect tax forms, mismatched income, processing errors and third party records. Before paying or agreeing to the notice, check with your tax return.
Mistake 5: Assuming a Tax Preparer Will Automatically Handle It
Hiring a tax preparer or tax professional is an option, but also be sure to keep track of the tax deadline. The United States Supreme Court in the case of United States v. Boyle concluded that a taxpayer’s reliance on an agent did not excuse him from timely filing his taxes since he did have such a duty.
Real-Life IRS Notice Examples
Example 1: IRS Says You Underreported Income
An IRS underreported income notice is sent to a taxpayer when an IRS 1099 is reported to the IRS, but not on the tax return, usually sent in the form of an IRS CP2000. Changes may be proposed by the IRS from third-party records such as those from employers, banks or other payers. The taxpayer may not respond to the letter and the proposed tax could proceed to become a balance due. CP2000 is not a bill; however it is important to carefully review it and respond in a timely fashion.
Example 2: IRS Says You Did Not File a Return
A taxpayer is issued a Notice of Deficiency when IRS calculates tax based on the information from the employer and financial institutions. According to the IRS, CP3219N is a 90 day letter. The taxpayer may file a petition for a tax court if he/she objects to the proposed tax within the time limit indicated in the notice. Simply, ignoring the IRS’ missing return notice may make the situation more complicated to rectify afterward.
Example 3: IRS Final Notice Before Levy
A taxpayer doesn’t pay the amounts due on the previous balance due notices, and is then sent an IRS Final Notice of Intent to Levy. It’s during this time that the taxpayer needs to act swiftly as the IRS levy can impact wages, bank accounts, state tax refunds, vehicles, real estate, and other property.
When Should You Contact a Tax Professional?
If an IRS notice impacts your money, deadlines, right to appeal, or property, then it is best to consult a tax professional, enrolled agent, CPA, or tax attorney. This is particularly true if the IRS notice is incorrect, the IRS issued you a Notice of Deficiency, or the IRS issued you a Final Notice of Intent to Levy.
Professional aid is also a good idea if your wages or bank account is jeopardized, if you’ve missed a deadline, if you owe more than you can afford, or if you need penalty abatement, an appeal or a Tax Court petition. A tax attorney will be able to examine the correspondence from the IRS, compare your records to the IRS, know your taxpayer rights, and determine which response is best.
This is important since there are some strict IRS deadlines. For instance, IRS rules provide a 90 day period of time in which to file a Tax Court Petition should the tax be challenged in the case of a CP3219N Notice of Deficiency. The IRS also has taxpayer rights, such as a right to have a representative represent and a right to appeal an IRS decision.
FAQs About Ignoring an IRS Notice
What happens if I don’t respond to an IRS notice?
The IRS may follow through on its proposed change, increase penalties and interest, send additional notices and/or initiate collection action based on the type of notice you receive if you do not respond to it.
Is it bad to ignore an IRS letter?
Yes. Many IRS letters have expiration dates for action, instructions on how to pay your taxes, or rights to dispute or appeal the action, but some letters are informational. Failure to heed the wrong notice can result in the problem costing more.
Can the IRS garnish my wages if I ignore a notice?
Yes. Should the tax debt not be resolved, and the IRS follows the necessary procedures to issue a tax levy, the IRS has the authority to garnish wages and/or levy other property. Typically, the IRS would first determine the taxes due, issue a demand to pay the taxes, the taxpayer fail to pay, and then issue a final levy notice at least 30 days prior to levy.
Can the IRS take money from my bank account?
Yes. Once the necessary collection steps and notices are issued, an IRS bank levy may be issued against your bank and/or other financial accounts. In the case of bank levies, the IRS says that the money will be frozen when the bank receives the levy, and that the IRS will receive the funds after 21 days following the bank’s receipt.
What happens if I miss the IRS deadline?
Formal dispute/appeal rights may be waived, depending on the notice. Notice of Deficiency: The Tax Court petition period is typically 90 days after the date of the notice, or 150 days if the notice is sent to someone outside of the U.S.
Can I still dispute an IRS notice after ignoring it?
Sometimes, yes. You might still have the opportunity to reach out to IRS, submit documents, petition for reconsideration of the audit, request penalty forgiveness, and/or negotiate with the IRS about collection options. However, after a certain time has elapsed, you may have fewer formal rights so it’s best to reply promptly.
What should I do if I cannot pay the IRS notice?
Do not ignore it. Take the time to review the notice, make a payment as you are able to, and consider working out a short-term payment plan, installment agreement or offer in compromise, or have your case placed in currently not collectible status. Currently not collectible does not necessarily mean a period of delay for the IRS’s collection of the tax debt, but penalties and interest will apply during that time.
Do I need a lawyer for an IRS notice?
Not always. Simple notices may be easily addressed and dealt with. But if a Notice of Deficiency exists, a large balance is due, a levy is looming, a lien has been filed, an audit has been issued, a missed deadline has occurred or a legal dispute exists, then a tax attorney, CPA or enrolled agent can be of assistance. The IRS has certain rights as well, and taxpayers are entitled to a representative, appeal some of the IRS’s decisions, and challenge the IRS’s stance.