December 09, 2020
In October 2020, the IRS announced that it will once again start sending out 500 series balance due notices to taxpayers who are delinquent. According to sources, there was a large backlog built up due to the COVID-19 pandemic, since they were unable to process payments and go through received mail. This led to some confusion, with notices going out about amounts that were already paid, as well as requests for payments with incorrect due dates. Now that everything has been rectified, the IRS is ready to start reissuing these notices. So, what happens when you receive one? What are your options? And what happened to cause this problem? At Enterprise Consultations Group, we have some expert tax advice to share with you to help you be well prepared for what’s to come.
Balance Due Notices Paused in August
This past March, when the COVID-19 pandemic caused various IRS offices to close down, mail started to build up. According to some sources, around 12 million pieces of mail remained unprocessed by the IRS. Anything sent to them, including requests for payment plans, as well as payments, wound up in a pile waiting to be processed. This backlog led to a number of problems, especially since the IRS didn’t cease sending out 500 series letters right away. As a result, some of the notices that went out were for debts that had already been paid (just not processed). Others had incorrect due dates. Up to 1.5 million incorrect notices were issued by the IRS. This was brought to their attention by House Ways and Means Committee Chair Richard E. Neal back in August 2020. He sent a letter to the IRS informing them of the problem. However, by that point, the IRS had already placed a hold on sending out any new 500 series notices until that mail backlog could be processed. That particular hold started in May.
500 Series Notices to Resume
Now that the mail backlog has been cleared, the IRS is set to resume sending out 500 series notices to tax payers who owe back taxes. They made this announcement in October of 2020, and notices then begun to be sent out. By the beginning of November, taxpayers who owed debts to the IRS once again started receiving these notices.
With that said, even though the IRS started sending out the 500 series notices once again, stating their backlog of mail was cleared up, many taxpayers claimed that the checks that they sent to the IRS were not cashed, leaving them wondering if they will receive a notice in error. Since there are multiple types of 500 series notices, this is likely, and some questions may be raised about this confusing situation.
Types of 500 Series Notices
There are three types of 500 series notices. They include:
- CP501 – This is what’s known as a balance due notice. It goes out to individuals to inform them that they have a balance due to the IRS. It also contains information about how to contact the IRS about the debt and states how much is due. It lists their various options as well, including payment plans and methods to question and verify the debt.
- CP503 – The next 500 series notice is a little more serious. The CP503 informs the debtor that the IRS intends to file a lien on their property (from vehicles to homes to bank accounts) if they don’t respond to the notice. It basically informs the taxpayer that the IRS hasn’t heard from them regarding the debt and that they need to get in touch with an IRS agent as soon as possible before they take further action against you.
- CP504 – This notice informs the taxpayer that they need to urgently get ahold of the IRS regarding a debt owed. If the balance isn’t paid as soon as possible or a payment plan between the taxpayer and IRS isn’t agreed upon and entered into, the IRS will take further actions in order to collect the debt. In this particular case, the IRS will seize the taxpayers state income tax returns.
Who May Receive These Notices?
Anyone who owes a debt to the IRS may receive one of these 500 series notices. Both businesses and individuals who currently owe the IRS money might get one in the mail. However, since the IRS may not have completely cleared their backlog as claimed, it’s possible that someone who receives one may have already paid their tax debt. If this is the case, then it’s important to respond to the IRS right away, informing them that a payment has been made.
What to do If You Receive a 500 Series Notice from the IRS
If you receive one of the 500 series notices from the IRS, it’s important to contact either the IRS, or even better, a tax professional to properly respond. Do not ignore the notice, as that can lead to a number of issues, such as further collection efforts. The IRS will not hesitate to place liens on your property in order to obtain any funds owed to them. Even though notices were paused due to the pandemic, the IRS will still do everything in its power to collect the back taxes that you have due. Thankfully, there are a number of options available for those who still owe the IRS.
The Taxpayer Relief Initiative
In addition to payment plans, the IRS created the Taxpayer Relief Initiative. This makes it easier for those who have been financially impacted by the COVID-19 pandemic to get relief on their tax debts. Parts of this plan include:
- Having New Debts Included in Current Payment Plans – In some cases, the IRS will take a new amount due, from a 2019 tax return, and include it in a payment plan that’s already in place. This breaks the amount due down into the number of months that are left and may raise the person’s monthly payment. However, it does help clear up the debt.
- Being Able to File for Payment Plans Without Specific Forms – In order to qualify for certain payment plans, those who owe less than $250,000 to the IRS can currently file a payment plan request without needed to submit certain financial forms. This simplifies the process and makes it easier for people to enter into a payment plan when they may not be able to pay the IRS in one lump sum.
- Some Relief from Penalties and Interest – If a taxpayer owes back taxes to the IRS for the first time, they may qualify for some relief from penalties and interest. However, this depends on a number of factors, and a form must be filed in order for the IRS to waive these amounts.
- Paying Lower Payments for a Limited Time – Those who are already entered into payment plans with the IRS may qualify for lower payments for a specific amount of time, even if they have new debts that are owed. Once that individual gets back on solid financial ground, payments can resume at the original amount. A form must also be filed in order to qualify for this option.
These are just a few examples of the options that taxpayers have upon receiving a 500 series notice. However, it’s crucial that you seek out a tax professional in order to see which options you qualify for and to have someone act as a go-between when communicating with the IRS on your behalf. It’s far too easy to make a costly mistake if you attempt to do this on your own.
What If Payments Aren’t Made?
If you owe debts to the IRS and have been happy to receive a small reprieve in the amount of notices that you receive from them, then it’s time to take that debt seriously. The IRS will do a number of different things to obtain the funds that you owe them, including:
- Placing Liens on Your Property – The IRS will place a lien on your bank account, freezing your funds until the debt is paid. They can freeze various types of accounts, preventing you from removing any money from them. In addition, they may place liens on your home, business building, or vehicles. When this happens, you cannot sell any of these assets. If you manage to do so, the IRS will take the funds owed to them first before you see any of the money from the sale.
- Seizing Your Tax Return – The IRS has the power to seize your federal and state tax returns, applying that money to your debt. The CP504 notice informs you of their intent in this particular case.
- Not Allowing You to Renew Your Passport – Like your driver’s license, the IRS can also suspend your passport. You will not be allowed to renew it, therefore, you won’t be able to travel outside of the country.
- Seizing Your Property – Those who avoid paying the IRS for a long time may have their assets seized. In these cases, the IRS will take your property from you and sell it at auction in order to use the money raised to pay off your tax debt. This is a last resort for the IRS, since it does take some time and effort to do. They prefer to place a lien and then inform you of it in order to get you to pay the debt on your own. However, this does remain a viable option for unresolved IRS debt.
Of course, you can avoid having any of these things happen simply by having a tax professional speak to the IRS on your behalf and informing them of your intent to pay (and setting up a payment plan, if eligible) upon receiving a 500 series notice.
What If Your Taxes Have Already Been Paid?
Some people who have already paid their taxes may see a 500 series notice appear in their mailboxes anyway. This is due to the fact that the IRS may not have fully cleared up their mail backlog. If you receive one of these notices and have paid your taxes, call the IRS right away or have your professional tax advisor contact them for you to resolve the situation.
Reaching Out to a Tax Professional
If you receive a 500 series notice from the IRS, it’s important to reach out to a professional tax preparer or advisor. Even if you did your taxes yourself, it’s crucial that you not attempt this type of communication on your own. It’s much too easy to make a mistake that may end up with you paying even more than your 500 series notice informs you of. Plus, if you want to enter into a payment plan to clear up the debt or believe that you qualify for one of their other relief options, a tax professional can help you by explaining your options, guiding you through the process, and filling out the required forms.
If you recently received a 500 series notice from the IRS and either have questions about it or aren’t sure about next steps, reach out to the tax advisors at the Enterprise Consultants Group. We can answer your questions, discuss your rights, and provide actionable options. Please contact us online or at (800) 575-9284 today to schedule a free and confidential consultation to see how we can help you.
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