So, you received a notice from the IRS. Don’t panic. The IRS issues hundreds of letters and notices to millions of taxpayers annually. It doesn’t always have to be bad news – and when it is, such as with a CP14 Notice, there are still several options to consider depending on your specific situation and the size of your debt. Yes, a CP14 Notice means the IRS believes you owe them money.
I Received a CP14 Notice – Now What?
When the IRS sends you a CP14 Notice of tax debt or liability, they usually note the tax assessment date and your due balance. In other words, what you owe. First, determine if this is true. Tax laws can also change, which may change how the IRS calculates federal income taxes.
Sometimes, we make a mistake on our return and miss out on an exemption or tax credit we should have received. At other times, we might have a more successful year than anticipated, meaning our estimated quarterly tax payments weren’t enough to cover the tax increase.
Figuring out what happened is crucial because you can still change it. If your tax return didn’t account for a tax deduction or exemption that you missed, it might explain the sudden debt. Alternatively, if you think the IRS made a mistake somewhere else, you can appeal their decision and send them the evidence to refute their claim.
But if the IRS is correct, and you owe them money, your best course of action is to respond quickly. While the IRS can take its time with serious collection actions, penalties and interest apply immediately after the deadline for your due tax expires. Agree to the IRS’ assessment and talk to a tax professional about entering a payment plan.
What If I Can’t Pay Right Now?
You can wipe it out with a single payment if your tax is low enough. A bank transfer or a payment from a debit or credit card is sufficient to deal with your tax debt. If you decide to pay online (the most straightforward option), do so only through the IRS’ official website or the IRS app.
Both will redirect you to the Electronic Federal Tax Payment System (EFTPS), a quick and secure payment platform for the IRS. You can also pay the IRS through a nearby field office. Do not fall for any attempted scams. While the IRS does employ a few debt collection agencies (these may change year to year), these agencies can never demand payment.
They can only direct you to the IRS’ official channels to set up a plan. You can negotiate a payment plan if you cannot afford to pay your debt in one go. Depending on your tax debt, this ranges from incredibly easy to somewhat tricky. For a debt below $50,000, you must apply online for either a short-term or long-term (monthly) installment plan.
Installment plans are automatically calculated at 72 months, but you can adjust your monthly payments to fit within a parameter you can afford to cut down on the payment time. If your debt exceeds $25,000, you may need to agree to a direct debit plan to avoid a federal tax lien, allowing automatic transfers to the IRS.
If you owe more than $50,000, you must file a Collection Information Statement and fill out a paper form for an Installment Agreement Request. You also lose protection from a potential federal tax lien until your debt is resolved.
How Does the IRS Punish Late Fees?
Naturally, the IRS doesn’t stand idly by if you decide to ignore their notices and letters. Depending on the size and severity of your tax debt, they will give you some time before utilizing collection actions to coerce payment, namely in the form of a Notice of Federal Tax Lien and then via a Notice of Intent to Levy.
Penalties are applied to late payments immediately, however. Filing a tax return late will cost you five percent of taxes owed per month, with a limit of 25 percent after five months. Failing to meet the deadline for your tax liability (i.e., tax debt) incurs a penalty of 0.5 percent per month, up to a maximum of 25 percent over fifty months.
These penalties stack with a slight reduction (5 percent becomes 4.5 percent per month for late filing fees), up to 47.5 percent of your tax owed after fifty months. In addition to monthly penalties, the IRS charges variable interest on all debts, with an interest rate that changes quarterly.
The rate at which the IRS penalizes tax debt means taking out a credit to pay back your debt (before the IRS can issue a tax lien) is generally better than waiting things out. Tax debt does expire, but this takes ten years plus tolling periods, and if you intend to tough it out, the IRS can pursue criminal charges for tax evasion.
But unless there is real criminal intent, the IRS generally prefers to coerce payment whenever possible, even if it means giving a taxpayer year of leeway (and a subsequently heftier tax bill). Another essential piece of information to note is that the IRS requires you to be up to date with all your current tax obligations and late returns before addressing your tax liability.
This means going back and filing at least the last three late or missing returns (and taking the opportunity to double-check them for errors and make adjustments as necessary). If you have multiple years of stacking tax debt, you can consolidate it with the IRS and pay it off. This is generally recommended.
Key Takeaways About CP14 Notices
Don’t wait too long – especially if you’ve recently received a CP14 Notice. Use this opportunity to address the issue as early as possible, minimize any unintended costs or penalties with the IRS, or get in touch with a tax professional to review and potentially challenge the CP14 Notice if you find that the IRS got something wrong.
Your rights as a taxpayer include the right to appeal every decision the IRS makes with legal representation. However, if your appeal is a waste of time, your tax debt will continue to grow – so it’s essential to be sure. The larger your tax debt, the greater your options. Talk to a professional today to figure out what your next step should be.