Recently a client called my office stating that she got a letter saying that the US Department of State has been notified that she was certified as seriously delinquent, and that the US Department of State will deny her application for a passport or passport renewal. She had some international travel coming up, so she was particularly worried that she would be stopped at the airport and prevented from flying. She kept insisting that she “had always filed her returns on time and did not know how the IRS can take such a drastic step of notifying the US Department of State regarding her passport without telling her”. I patiently listened and then set up an appointment for the next day considering the urgency of the situation. I asked her to bring that letter as well as any other IRS letters she might have received in the past few months.
She came to my office on time the next day holding a big stack with almost 30 unopened envelopes from the IRS. I was expecting about 4-5 letters but did not expect about 30 of them.
I opened the letters, sorted them by tax year, and then by date – most recent to the oldest, and then came up with a game plan on how to proceed.
She was correct in stating that she had filed all her returns on time with the IRS. So, what really happened? How did she end up getting a letter that she had been certified as seriously delinquent?
She had filed her returns on time, but the filings generally had an average of $30,000+ balance owed to the IRS. This had gone on for over 3 years, and her total balance including penalties and interest was closer to $230,000+. Of this, almost $75,000 was the Failure to Pay Penalty, and Interest was about $65,000.
But how come she never realized that she had run up her tax balance to almost $250,000+? And how does the IRS even have the authority to talk to the US Department of State to certify her as seriously delinquent? Why did the IRS not give her any due process?
Well, the letters are the first clue. Many people do not realize that most of the IRS notices are legal notices. IRS is required by law to send many of these notices to you. For example, when a tax return is filed with a balance, IRS sends out an innocent looking CP14 notice notifying the taxpayer filed their return with a balance and that they have 10 days to pay the balance. However, this is a very powerful notice that sets off a long chain of events in the IRS collection cycle. This is a Notice of Tax Due and Demand for Payment letter – a Legal notice required to be sent by the IRS. This letter kicks off a chain of events – it puts the taxpayer on notice regarding the payment, and if payment is not made after such a demand is made, a silent lien arises in favor of the United States upon ALL property and ALL rights to property, whether real or personal, belonging to such person. Simply put, IRS now has a lien against all your existing property (real property as in house or buildings you currently own), or any property you purchase in the future. The lien remains in effect until the IRS balance is satisfied. This letter also starts the IRS collection cycle. This letter is also the main pre-requisite for filing a formal lien at your County Recorder’s office, and for issuing levy against your property (wages, etc.)
Other notices include the CP501, CP503, and CP504 (sent via certified mail which allows IRS to start taking your state tax refunds to offset your IRS tax balance).
If the taxpayer ignores these notices, the next escalation by the IRS is to start the levy process. Before the IRS can formally levy a taxpayer’s property (such as wages etc.) the IRS needs to give the taxpayer 30 days to file a Collection Due Process hearing. This is conveyed through a Letter 1058/LT11 notice. If there is no response from the taxpayer, the IRS proceeds with a levy action, and the serious delinquency certification.
Upon reviewing my client’s letters, it was very clear that she had ignored all these notices. There is a general myth with many taxpayers – if a notice is not opened, it “does not count”. The other myth is that if I do not live at the address that the IRS has mailed the letters to, then it “does not count”. This is far from the truth. If the IRS mails the letter to your “Last Known Address” (which is generally the address used on your last filed tax return), that letter is considered to be delivered to you (though you have moved from that address years ago).
Being an ostrich and sticking your head in the sand and not opening the notices is the worst thing you can do with an IRS notice. If the client had contacted me when she had received the first set of notices, it would have been a lot easier to fix the issue and would have cost a lot less. Now, the situation had escalated and ended up a lot costlier to fix. I was able to fortunately intervene and get the certification reversed.
So, the next time you get an IRS notice, please open it and read what is inside. If it was sent via certified mail that requires you to sign for it, please accept it and read the notice, and contact professional tax help early from a nearby Enrolled Agent. Otherwise, you may be depriving yourself of the rights given to you.
