Tax Blog

IRS CP504 Notices Are Back: Understanding Your Options and Next Steps

Introduction

Dealing with tax issues can be challenging, especially when faced with a CP504 Notice from the Internal Revenue Service (IRS). This notice, formally titled “Notice of Intent to Levy,” is an important communication from the IRS indicating that you have an unpaid tax balance. It also outlines the potential consequences if this balance is not addressed. You need to understand the nuances of this notice to effectively manage your tax obligations and avoid further complications, especially because the IRS recently reopened the floodgates on the issuance of CP504s.

Understanding the CP504 Notice

The CP504 Notice is essentially the IRS’s way of informing you that you have an outstanding tax debt that has not been paid. This notice is a serious matter, as it indicates that the IRS is preparing to take action to collect the debt. The actions they can take include levying your income and bank accounts or seizing your property, including any state income tax refunds.

This notice is not the first step in the collection process. It usually follows previous attempts by the IRS to inform you of the outstanding debt and request payment. The CP504 serves as a final reminder and a formal warning of impending action if the debt remains unpaid.

Recent Developments in IRS Automated Collection Notices

After nearly two years of suspension, the IRS has resumed sending automated collection notices, including CP504. The recent delivery of CP501, CP503, and CP504 notices was somewhat unexpected and has implications for taxpayers awaiting resolution of their tax debts.

Insights from Tax Professionals

Tax professionals like Chicago attorney Kelly Hanley have noted the sudden influx of 500-series notices related to the 2022 tax year. Despite the IRS’s prior announcement of a pause in automated notices due to processing backlogs and taxpayer confusion, the recent actions suggest an abrupt change in approach. The notices, particularly the CP504 Notice, are an indication of the IRS resuming its compliance activities, potentially catching taxpayers and tax professionals off guard.

The Sequential Nature of Notices

Typically, the IRS issues notices like CP501, CP503, and CP504 in a sequential manner, each serving as a reminder of the outstanding tax debt. The CP504 Notice, being the final notice and a warning of intent to levy, is usually sent after the earlier CP501 and CP503 notices. However, we’ve noticed that some taxpayers are receiving the CP504 without having received the previous reminders. This unusual pattern may be due to the system catching up after the hiatus, directly moving to the CP504 as a final notice.

Impact of a CP504 Notice

The implications of receiving a CP504 Notice are significant. If you fail to respond or address the debt:

  • The IRS may file a Notice of Federal Tax Lien, which is a public declaration of the IRS’s legal claim against your assets.
  • The IRS can levy (seize) your assets, including wages, bank accounts, business assets, personal property, and even Social Security benefits.
  • A federal tax lien may arise, affecting all your current and future properties until the debt is settled.
  • Your U.S. passport could be denied or revoked under the Fixing America’s Surface Transportation (FAST) Act if you have seriously delinquent tax debt.

Impact of the Resumed Notices on Taxpayers

The resumption of these notices, especially the CP504, is significant for several reasons:

  • Accrued Interest and Penalties: As noted by National Taxpayer Advocate Erin Collins, despite the temporary halt in issuing notices, unpaid balances continued to accrue interest and penalties. Taxpayers who might have perceived the pause as a sign of leniency now face the reality of their mounting tax obligations.
  • Timing and Professional Availability: The decision to resume notices in November is strategic, given the lower activity periods for tax professionals and shorter IRS phone wait times. This timing allows for more efficient handling of taxpayer inquiries and resolutions.
  • Taxpayer Readiness: The lack of a prior announcement regarding the resumption of notices means that many taxpayers may be unprepared for the sudden communication from the IRS. This could lead to confusion and urgency in addressing their tax debts.

Immediate Steps to Take

If you receive a CP504 Notice, take immediate action. Here are the steps you should follow:

  • Read the Notice Carefully: The notice contains important details about the amount you owe, including any additional penalties and interest. It also outlines your payment options.
  • Contact the IRS if You Disagree: If you believe there has been a mistake or if you’ve already taken steps to address the debt, you need to contact the IRS immediately using the toll-free number provided in the notice.

Options for Payment and Resolution

If you can’t pay the full amount immediately, there are several options available:

  • Payment Plans: The IRS offers payment plans, including installment agreements, which allow you to pay off your debt over time.
  • Partial Payment or Offer in Compromise: In some cases, the IRS may accept a lesser amount than what is owed, depending on your financial situation. This is known as an Offer in Compromise.
  • Temporary Delay of Collection: If you’re facing financial hardship, the IRS may temporarily delay collection until your financial condition improves.
  • Appeal Options: If you disagree with the notice or the proposed levy, you have the right to appeal. The Collection Appeals Program (CAP) and Collection Due Process (CDP) are two avenues available for taxpayers to challenge the IRS’s actions.

Proactive Steps and IRS Assistance

Taking proactive steps is key to managing and resolving your tax debt. Here are some strategies:

  • Verify the Accuracy of the Notice: Ensure that the notice is indeed from the IRS and that the details regarding your tax debt are accurate.
  • Gather Documentation: If you disagree with the notice or have already taken corrective action, gather all relevant documentation, such as canceled checks or payment agreements, before contacting the IRS.
  • Understand Your Rights: Familiarize yourself with your appeal rights and the procedures for filing a protest if you disagree with the IRS’s actions.
  • Seek Professional Help: Consider consulting with a tax attorney, especially if your tax situation is complex or if you’re considering options like an Offer in Compromise.

Conclusion

The IRS’s decision to restart the issuance of automated collection notices, particularly the CP504 Notice, calls for heightened awareness and swift action from taxpayers. Understanding the implications of these notices, staying informed about the options available, and seeking professional guidance are key steps in effectively managing and resolving outstanding tax debts. As the IRS reinitiates its compliance efforts, taxpayers must be proactive in addressing their tax obligations to avoid further financial complications.

Receiving a CP504 Notice from the IRS can be daunting, but understanding your rights and options is the first step in resolving your tax issues. Whether it’s paying the full amount, setting up a payment plan, or exploring other resolution options, you must act quickly and decisively. Remember, ignoring the notice can lead to severe consequences, including levies, wage garnishments, and liens. By taking informed and proactive steps, you can work towards a positive resolution of your tax obligations.