How Does the IRS Collect Unpaid Taxes?

  • Accracy
  • 26th Nov, 2023

So, you owe some back taxes. What's next? The IRS won't come knocking on your door – or your bank account – the day after your taxes are due, but give it enough time, and the Internal Revenue Service will come to collect unpaid taxes.

How Does the IRS Collect Unpaid Taxes?
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What actions does the IRS take when you owe back taxes?

When you file your income tax return every year, you are essentially telling the IRS how much you owe the government in taxes. The IRS expects you to pay your tax bill when you file your return, and if you don't pay, or you can't pay, your payment is overdue and considered back taxes.

You can also incur back taxes if you don't file your tax return. When you don't file a return, the IRS simply estimates what the agency thinks you owe in taxes and sends you a bill. Often this IRS-generated tax bill is higher than what you likely owe, because it only takes into account your income—not any deductions or credits that you would qualify for. But regardless of whether you tell the IRS what you owe, or they tell you, you have back taxes that need to be handled.

If you fail to handle your back taxes, the IRS will handle payment for you. There are three common IRS collections actions taken when you have unpaid taxes.

Establish a federal tax lien

A lien is essentially a hold or claim. When the federal government hasn't gotten their money, they can slap a claim on your property as a federal tax lien. When you go to sell that property, you won't be able to until the government removes the lien (after getting paid), or they allow the sale with the condition that any profits go directly toward paying your tax bill.

Place a levy on your property

While a lien is a hold on your property, a levy confiscates it. If the IRS decides to levy your property, they will send you a Notice of Levy, or CP504, letting you know they plan to confiscate it, sell it, and then use the proceeds to pay your tax liability. In short, the IRS reaches into your pocket and takes the money you owe.

The most typical IRS levies are on personal property like cars, boats, or real estate you own. The IRS can decide to use wage garnishment to levy your wages, retirement income, social security income, or the contents of your bank account.

Offsetting a federal income tax return

If you owe back taxes from previous years, but are expecting to get a tax return this year, you may be disappointed. The IRS isn't going to send you money if you haven't sent them theirs. A common strategy the IRS uses to collect the balance due from the past is to simply collect them from your current or future income tax refunds.

When does collection action start?

It's important to note that if your taxes were due on Monday, the IRS isn't going to slap a lien on your house or levy your bank accounts on Tuesday. There is a notification process, and the IRS offers many opportunities to settle your tax debt before they begin collection efforts. In fact, cleaning up missing tax returns and paying off back taxes will likely be less stressful than simply waiting for the IRS to act against you.

If you forgot to file taxes by the due date or got overwhelmed by the process, rather than wait for the IRS to come knocking, consider working with accounting professionals and enrolled agents with Accracy to get your books cleaned up, your late tax returns filed, and sort out your back taxes. You'll likely pay less in taxes owed, and you'll certainly pay less in fees. You'll also have the benefit of remaining in control of your finances, rather than ceding control to the IRS.

But if you miss the filing deadline and don't take action on your own, the IRS will consider your taxes delinquent the day after the tax filing deadline. Fees will accrue and the IRS will begin sending notices through the mail to alert you of overdue taxes and then to inform you of the next steps they plan to take to collect.

Because businesses are structured in different ways, and every situation is different, there is no uniform timeline for collection. You will be offered an opportunity to pay missing taxes and sort out the late tax bill on your own before the government takes punitive steps beyond late filing and payment fees.

For how many years can the IRS collect back taxes?

For most common back tax scenarios, there is a 10-year statute of limitations for collecting back taxes. Federal law essentially gives the IRS collection process ten years past the filing deadline for each year's taxes to collect what is owed. If you failed to file your taxes in 2020, for example, the IRS has until 2030 to collect what is owed. The last date for collections following that ten-year period is the Collection Statute Expiration Date, or CSED.

What happens if you can't pay the taxes you owe?

The most important thing to keep in mind is that the IRS wants you to pay your taxes. It behooves the agency to make the late tax payment process easier for you, so the IRS has created several programs to make it easier to pay your back taxes before they proceed to collections. To help taxpayers settle their tax bill, the IRS has several options for tax relief bundled in their Fresh Start program. The program includes options to:

  • Set up a payment plan or installment agreement with the IRS to make monthly payments until your tax bill is settled.
  • Pay a smaller amount of the taxes you owe through an Offer in Compromise if your failure to pay was a result of financial hardship (this is something you'll need to prove).
  • Legally defer your tax payments until you can more easily pay through a Currently Non Collectible agreement.

Missing a tax deadline can be stressful, especially when you're not sure what to expect from the IRS regarding missing payments. If you got behind on your taxes, your best option is to be proactive about getting caught back up.

Let Accracy help you get your bookkeeping in order so that you can file your missing tax returns and stay on top of your taxes moving forward. We even have tax professionals to help you sort out your best options for tax relief, so you can get your books cleaned up for good.

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