tax debt

Over half of all debt currently in collections stems directly from medical debt, with 75% of all debt in collections coming from medical, telecommunications, utilities, and rental and lease obligations. On top of that, a small percentage of debt that’s currently handled by private debt collectors comes from delinquent tax accounts. You might soon find yourself in that statistic if you recently received an IRS CP40 notice in the mail.

If the IRS assigns your account to a private debt collector, the agency will send you a CP40 notice. When you receive this IRS notice, it’s important for you to take the time to research your options and make an informed decision on how to handle your tax debt going forward. Learn more about what an IRS CP40 notice means for you and how a tax resolution firm can help you navigate the complexities of your situation below.

What is a CP40 IRS Notice?

This letter is an informative notice to let you know the IRS will be handing over your tax account to a private debt collector. The letter will also tell you that you will be getting a future letter and call from the collection agency.

Did you recently receive an IRS CP40 letter in the mail? This notice from the IRS shouldn’t come as a shock– you should’ve received several prior notices from the IRS regarding your delinquent tax situation. By the time you get a CP40 notice, your tax delinquency has progressed past the point of financial penalties and fees.

Why You Might Receive a CP40 Notice

You might receive a CP40 notice if you owe a tax debt and don’t make any efforts to pay off what you owe. If the IRS cannot get in touch with you for a significant period of time, they might consider your account inactive. To help get things moving again, the IRS may decide to assign your account to a collection agency.

At that point, you’ll get the CP40 letter in the mail to inform you about the IRS’s decision.

How to Respond to an IRS CP40 Letter

By the time you get this type of letter from the IRS, it may be that you had forgotten all about your past tax debt issue. You may have thought that the issue had resolved itself or gone away, but this notice will remind you that you need to take action. There are specific steps you should take before responding to your letter. Below, we’ll go over what to do step-by-step.

Read Through Your Letter

First, you need to carefully review the letter. As you read through the letter, you should notice a website URL. The website www IRS gov CP40 will bring you to the official IRS website that describes the intent of your letter. If you have any questions about why you received the notice or you want general details about the IRS, collection efforts, a CP40 notice, or other tax issues, visit the IRS site directly for answers or reach out to a tax pro.

Verify the Accuracy of the Details of the Letter

As you go through your letter, you need to check everything for accuracy including any personal details or information that states how much you owe. It’s important to get in touch with the IRS to determine if you possibly received the letter in error. The letter is a mistake if you’ve already applied for a payment plan with the IRS, the tax debt is assigned to a minor or deceased taxpayer, or the details in the letter are wrong. In these cases, you’ll want to contact the IRS directly to clear up the confusion.

Make an Informed Decision on How to Handle Your Debt

Next, you need to consider your options and make an informed decision on how to handle your situation. We’ll go into more detail on what options you have below. Depending on your situation, it might be in your best interest to contact a tax expert to go over the unique facts and circumstances surrounding your tax situation.

Save a Copy of the Letter

Finally, be sure to save a copy of your letter. The IRS website also directs taxpayers to do this. This step is important because you will need the letter later. Not only can you use the notice for reference purposes, but it should also have specific confirmation numbers within the letter that will help you verify your identity with the collection agency.

Once the debt collector gets in touch with you, they will ask you for the numbers in the letter. You will also want to use this letter for your own purposes. When you get in touch with a debt collector, you should ask them for the last five numbers of the code on your letter. A legitimate collector should be able to provide you with that information.

Options for Repaying Tax Debt

The first option you have for handling a CP40 notice is getting in touch with the IRS and paying your balance in full in one major lump sum. This step will completely resolve your tax debt and get you back in good standing with the IRS. You won’t have to worry about the third-party debt collectors.

For most, paying their balance in full is out of reach, which is why they’re in debt in the first place. That said, there are other options. One of the most common strategies is to apply for an IRS payment plan. A payment plan allows you to pay off your debt over a long period of time while the IRS agrees not to pursue further collection efforts. You can set up a payment plan through the collection agency or by contacting the IRS directly.

Depending on your unique circumstances, there could possibly be other options for you. The IRS allows some taxpayers to get penalty relief if there is “reasonable cause” as to why they haven’t paid their tax burden. This process, called penalty abatement, isn’t available for everyone. Another option is called offer in compromise, which is a payment plan with the IRS but the IRS agrees to reduce your overall tax burden in exchange for your payment compliance.

Another option is to file for currently non-collectible status. The IRS will only approve you for this status if you can genuinely prove that you are unable to pay your tax debt burden without experiencing financial distress.

Finally, you have the option of disputing the tax. The options vary based on the reasons for the dispute and how long ago the debt was assessed. For example, you may be able to apply for an offer in compromise based on doubt of liability.

Consequences of Ignoring a CP40 IRS Notice

You also have the option of not acting at all after receiving your CP40 notice. This decision isn’t without consequences, though. Doing nothing means your tax debt will get handed over to the collection agency. When they’re unable to collect, the IRS is likely to initiate further efforts against you.

The IRS has the authority to leverage pretty serious collection efforts, like garnishing your paycheck or even seizing your property. To avoid these kinds of consequences, your best option is to contact the IRS or the collection agency to get started on paying back what you owe.

FAQs: IRS CP40 Notices and Paying off Your Tax Debt

Do you have more questions about your recent IRS CP40 notice and how to handle it? In general, it’s best to discuss your specific situation with an attorney. Your lawyer will be able to provide you with solid legal counsel based on your unique facts and circumstances. In the meantime, we’ll go over some general advice and answers to some of the most frequently asked questions below.

How Can I Tell if a Collection Agency is Legitimate?

One of the best ways to ensure the collection agency is legitimate when they contact you is to save your original CP40 letter and ask the representative to confirm the last five numbers of the code on your letter.

If you have more questions, you can also visit the website listed on the letter, www irs gov CP 40.

You can also verify that the collection agency is one of the IRS’s official contracted agencies. You can always check the IRS website to see a full list of third-party collectors that are working with the tax agency. As of 2024, the IRS is working with Coast Professional, CBE, and CoServe.

What Should I Expect with an IRS Collection Agency?

You should expect the collection agency to contact you and attempt to get you to pay what you owe. They will likely ask you questions about your current ability to pay and why you haven’t already paid. They’ll attempt to help you set up a payment plan and remind you of when you have payments due.

Private collectors are subject to strict rules about what they can say and how often they can contact you. Unfortunately, however, this industry is rife with abuse. If you feel like your rights have not been respected, reach out to a tax attorney or consider contacting the Taxpayer Advocates, an independent part of the IRS.

What’s the Difference Between the IRS and a Third-Party Collection Agency?

The IRS has far more authority and rights than a collection agency. The IRS has the power to garnish your paycheck, seize property, and add penalties and fines to your account. A collection agency is only authorized to accept payments and help you set up a payment plan. They are not allowed to threaten, harass, or intimidate you.

What Can the Collection Agency Do If I Don’t Pay Back My Tax Debt?

A collection agency is not authorized to initiate further collection efforts against you. They are only authorized to collect your debt or help you set up a payment plan.

What Can the IRS Do If I Don’t Pay My Tax Debt?

If you don’t pay your debt, then the IRS can garnish your wages, seize your property, and even levy your bank accounts. It’s possible you can even be charged with a crime if you willfully avoid your taxes.

Can You Request Your Tax Debt Case Go Back to the IRS?

Yes. You can request that your tax debt account be given back to the IRS, and you aren’t required to work with the collection agency. To make this request, you’ll want to draft up a letter to the collection agency asking them to cease communication with you.

From there, you’ll need to contact the IRS and ask them to take control over your account again. In many situations, this may be your best option since the IRS can provide a wider variety of relief options depending on your circumstances.

Does the IRS Ever Forgive Tax Debt?

Yes. It is possible for the IRS to forgive tax debt, but they only do so in very limited circumstances. For instance, an offer in compromise agreement might be a possibility depending on your specific situation. This type of arrangement happens when the IRS forgives a part of your IRS tax debt in exchange for an agreement from you to pay off the remaining balance in a lump sum.

How Do I Know if I Need Tax Help?

It’s a good idea to consider tax resolution services if you’re potentially facing legal consequences or substantial collection efforts against you as a result of your tax situation.

Are You Looking for a Tax Resolution Law Firm?

Have you fallen behind on your taxes and recently received a CP40 notice? If you have questions about what you owe, you want to know more about your options, or you just want to be sure you have a legal advocate by your side to represent your best interests, our firm can help.

Schedule a meeting with our team here at Seattle Legal Services PLLC to discuss your tax situation in more detail and get started on your tax resolution journey today.