Smart Tax Planning

Got a scary letter from the IRS, threatening to seize your refund? How to proceed

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Key Points
  • The agency has been working its way through a massive mail backlog that’s accumulated since the spring, right when the pandemic hit.
  • This fall, some taxpayers received a “notice of intent to levy” from the IRS, a letter that threatens the seizure of state income tax refunds – even if they’ve mailed a check or their tax professional has mailed documents to dispute the amount owed.
  • If you received a “notice of intent to levy,” contact your tax professional immediately. They may need to contact the IRS to clarify the matter.
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Some taxpayers are just now receiving a scary letter from the IRS: a warning that the federal taxman will seize their state income tax refund.

As recently as this fall, the IRS has issued a so-called "notice of intent to levy" to taxpayers with an outstanding balance.

The letter warns recipients that if they don't pay the amount due immediately, the agency will seize their state income tax refund and apply them to the balance owed.

From there, the IRS can crank up the heat. The notice also warns that the agency can levy rights to property, including wages, bank accounts, Social Security benefits and personal assets.

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Here's the surprise: Some taxpayers are receiving this notice even if they sent the agency a paper check in the mail or their tax professional has sent paperwork requesting a first-time penalty abatement.

"That's the frustrating part about it," said Brian Streig, CPA and tax director at Calhoun Thomson + Matza in Austin.

"These are things people have already responded to, but the IRS hasn't processed that mail," he said. "We've sent back the requested documents, we've answered the questions to the initial notice — and they're acting like we've never responded at all."

The agency is looking into the matter, according to IRS spokesman Eric Smith.

"Taxpayers and tax professionals in this situation should call the toll-free number on their levy or other notices for assistance," he said.

"We appreciate the patience of taxpayers and their representatives given the circumstances, and we will work with them to resolve cases as expeditiously as possible and provide appropriate relief where warranted," said Smith.

A backlog and pause of mailed notices

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Earlier this year, the IRS developed a massive backlog of unopened correspondence. This summer, there were as many as 12 million pieces of unopened mail, according to House Ways and Means Committee chairman Richard E. Neal, D-Mass.

The pandemic struck just as taxpayers geared up to file their 2019 tax returns, and many IRS employees were sent home to minimize spread of the virus.

The agency paused sending some of its "balance due" notices — including this "intent to levy" — starting on May 9, due to Covid-19.

The IRS resumed sending these letters to taxpayers in late October, which is why some tax practitioners have been hearing from concerned clients in recent weeks.

What we've advocated at the AICPA is 'Don't send the collection notices – at least wait until year-end.
Jan Lewis
member of the American Institute of CPAs' Tax Executive Committee

"You can find people whose checks haven't been cashed, as well as returns showing up as not being sent, even though they've been mailed in," said Streig.

"What we've advocated at the AICPA is 'Don't send the collection notices – at least wait until year-end,'" said Jan Lewis, CPA and member of the American Institute of CPAs' Tax Executive Committee.

The organization has been in contact with the IRS on this matter.

"They should be able to stop the collection notices from coming, but they're not," Lewis said. "You have panicked clients, so our hands are tied to a certain extent and it's very frustrating."

Pay now, push back later?

The Internal Revenue Service's offices in Washington, D.C.
Adam Jeffery | CNBC

While filers have the option of paying the IRS online, there's the question of whether it makes sense to do so when the paper check is already sitting in a mail backlog — or whether taxpayers should pay even if they're disputing the amount owed.

Indeed, Dan Herron, CPA and principal of Elemental Wealth Advisors in San Luis Obispo, California, has a client who owed $3,600 and was hit with a penalty for being late to pay the amount.

Since the client is otherwise in good standing with the IRS, Herron requested a first-time penalty abatement in late summer via certified mail.

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Though Herron says that that he has a receipt from the U.S. Postal Service showing that the letter was delivered, the client still received a "notice to levy" from the IRS in early November.

After the client spent 2½ hours on hold with the taxman, Herron recommended paying the amount owed and moving on for now.

"I suggested paying it to avoid the accrual of further penalties and interest, then ask for forgiveness later," he said. "It's a bummer because it's a big chunk of change, but you're at the mercy of the IRS."

Lengthy hold times

Jose Luis Pelaez Inc

While practitioners have access to the IRS through a special hotline, getting a representative on the phone has been difficult in recent weeks. This makes it harder to address those "notices to levy."

"Trying to talk to the IRS is problematic now," said Ann E. Kummer, CPA and partner at Kirshon & Co. in Poughkeepsie, New York. "We can fax the IRS while we speak to them on a practitioner priority line, but it's still difficult to get through."             

Practitioners also need a power of attorney to contact the IRS on a client's behalf, which can add more time to ironing things out with the taxman, Kummer said. The taxpayer must file a form with the agency to authorize a professional to represent them before the IRS.

"Getting the power of attorney processed is also tremendously backlogged, taking six weeks or more in many circumstances," said Kummer.

After multiple attempts, Streig at Calhoun Thomson + Matza was able to get the IRS on the phone just prior to Thanksgiving, and the agency put a hold on the "intent to levy" notices for two clients.

"The representative could see the client's response was received back in June, but that no one opened it until last week," he said.

Don't do it by yourself

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If you receive a notice to levy in the mail, your first call should be to your tax professional.

Since these notices tend to be time-sensitive, you'll want to avoid using the mail — either to respond to the agency or submit a payment.

"You can respond in writing, but the chances of them opening the mail before the deadline aren't going to happen," said Streig. "You'll definitely want help on this."

When it comes to the IRS, never assume that no news is good news.

"If you owe and you haven't heard from the IRS in months, you must be proactive and aggressive," said Lewis Taub, CPA, director of tax services at Berkowitz Pollack Brant Advisors + CPAs in New York.

"If you owe the IRS money, let that be your initiative to get things done and reach out to your tax practitioner," he said.