Over half of U.S. taxpayers hire tax professionals to prepare their annual income tax returns, especially when navigating the complexity of the IRS debt collection process Tax preparers are often instrumental in guiding taxpayers through IRS inquiries and addressing concerns related to unpaid taxes.
In this article, we will explain when debts are transferred to private collection agencies and how this impacts the debt collection process. We’ll also provide essential information on the IRS CP140 notice and share strategies on how your clients can avoid an IRS levy. With this knowledge, you will be better equipped to assist clients and steer clear of potential scams.
How the IRS uses private collection agencies
The Taxpayer First Act allows the IRS to use private collection agencies for certain inactive tax debts. If your client receives an IRS CP40 notice (or CP140 for business owners) with an authentication number, the IRS has turned over their debt to a private collection agency. The agency will send a letter with the same authentication number and information on how the taxpayer can resolve their overdue taxes. However, tax preparers should always advise clients to be vigilant against scams by confirming the legitimacy of communication received from a collection agency.
Make sure that the client has received both letters with the matching authentication number. Some Dirty Dozen scams now involve realistic-looking IRS letters using stolen tax information, such as prior-year refund amounts, to trick taxpayers out of cash.
The collection agency will also reach out by telephone. Both the taxpayer and the agency will exchange the authentication number to identify themselves. When contacted, the taxpayer should make sure the caller is from one of the private collection agencies listed on the IRS website.
The Taxpayer First Act enhances taxpayer’s rights in dealing with the IRS, including changes to the collection of delinquent and unfiled taxes, such as:
- Greater taxpayer protections from private tax debt collectors
- Modified IRS procedures on summonses and notice with respect to third-party contacts
- Income-based waivers or deferment for delinquent taxes
- Direct payment options
Note: Federal law prevents the agency from threatening, harassing, or even collecting money. All collection payments are made directly to the IRS or the U.S. Treasury – never to the agency.
IRS Notice CP40
IRS CP40 notice is an official communication to notify taxpayers that the IRS has transferred their tax debt to a private collection agency. This notice not only provides information about the transfer but also includes the name and contact details of the assigned collection agency. When clients receive a CP40, they may have several questions. They may have concerns about what this shift means for their tax situation, how to verify the legitimacy of the collection agency, and whether they should respond immediately.
It’s important to advise taxpayers not to engage with the private collection agency until they have received the CP40 notice from the IRS in the mail, as this helps to mitigate the risk of falling victim to scams. You should also inform clients to compare the details provided by the collection agency with the information in the IRS CP40 notice. If there are discrepancies, they should contact the IRS for clarification and further assistance.
Account types
The IRS typically sends tax accounts to private collection agencies for various reasons, primarily focusing on older, unresolved debts. This may apply to clients with debts consisting of delinquent taxes that remain unpaid over a substantial period and accounts that have experienced liens or levies due to non-compliance.
You can reassure clients that certain account types are maintained internally by the IRS. For instance, current liabilities where your clients actively make payments or have established payment plans will usually remain under IRS management.
Similarly, accounts related to ongoing appeals or reviews, such as those contesting tax obligations, are kept within the IRS until a resolution is achieved. Additionally, cases involving innocent spouse requests, where relief from joint tax liability is sought, will be retained by the IRS until determined.
IRS in-person visits for unpaid taxes
IRS revenue officers (RO) may visit clients who have been evading all other forms of contact about their ongoing compliance issues. Although revenue officer visits are generally unannounced, IRS emphasizes in Fact Sheet 2019 15 that these visits will only occur after the taxpayer ignored numerous contacts by mail about an existing tax issue.
Advise clients that a legitimate RO is there to help them understand and meet their tax obligations and is forbidden to threaten or request unusual forms of payment. The RO will not demand tax payment without the opportunity to question or appeal the amount. If there is outstanding federal tax debt, the RO will offer payment by a check payable to the U.S. Treasury or online payments through the Electronic Federal Tax Payment System (EFTPS).
When an RO visits, your client has the right and should request to see two forms of official identification that include a serial number and a photo of the revenue officer. Revenue officers do not carry badges, which would be a sign of a scammer at work. The IRS provides additional information on identifying legitimate IRS representatives and how to report scams..
Help clients avoid IRS collection actions
As a tax professional, you are in a unique position to educate your clients and community on how they can proactively handle unfiled or unpaid taxes before IRS collection efforts begin. Whether your client has years of unfiled taxes or they simply can’t afford to settle their debt, there are options to bring their accounts current without collections.
If your client owes the IRS but is unable to pay, there are a few avenues open to reducing the hardship of that debt:
- Installment agreements to pay gradually
- Temporary delay of collections while in financial hardship
- Offer in compromise to reduce total liability
Counsel your clients to bring their taxes up to date if they are behind in filing. Unlike 1040s that will receive refunds, which expire after three years, it is never too late to prepare and file paper returns with taxes owed. The IRS is more amenable to work out an agreement when all returns are filed.
