Tax Assessment vs. Tax Collection

What is the difference between a tax assessment issue and a tax collection issue?

This is a question I’ve had come up frequently with clients, and it usually goes something like this:

Client: This is crazy! I just got a letter from the IRS saying I owe an additional $15,000! There’s no way I can come up with that kind of money, this can’t be right!

Me: I understand, that is a ton of money. Would you mind providing me a copy of the letter you received so I can see what the IRS is basing this on?

Client: I don’t care what it’s based on it just needs to be fixed. Like I said, there’s no way I can pay that.

Here’s the thing- The IRS is actually divided (broadly) into two separate divisions. The first handles tax assessment issues, which includes audits, appeals, refunds, and the like. The second handles collection issues. These two divisions have very little, if any overlap.

This can be confusing. After all, many taxpayers feel that if they do not have the means to pay for a tax debt, then surely they cannot be assessed for and expected to pay that amount. This is a natural, and dare I say logical, way to look at it. Unfortunately that isn’t how it works.

One helpful way to think about it is the tax assessment side of things looks at whether the tax imposed is lawful and legitimate based on the tax code itself. It takes into account things like all form of the taxpayer’s income in a particular year, any withholdings from the tax year, as well as all applicable deductions and credits, plus lawfully applied penalties and interest where appropriate. Then it very mechanically comes up with a number.

There are many reasons why taxpayer may have taxable income but not have the money on hand to pay the related taxes. Take a very simple example. Imagine you have an old couch you want to replace. You sell the couch and buy a new one for more than you sold the old one for. Now you have even less actual money than you started with because all the money you earned from selling the couch, plus some extra, was put into buying the new one to replace it. For tax purposes when you sold the old couch and received money in return for it, that’s income that you owe taxes on, regardless of what you subsequently do with the money between then and tax season.

Once a tax is properly assessed, it moves to the collections division. Here, the personal

circumstances of the individual taxpayer are taken into account. At least, to a greater degree. The section deals with the very practical issue of how the taxpayer is going to pay their tax debt and come into compliance with the IRS. This can come in the forms of liens or levies against the taxpayer’s personal property, which is undesirable for all involved. It can also come in the form of negotiations between the taxpayer and the IRS to figure out what makes the most sense in a particular situation. The taxpayer may enter into a payment plan, wherein they pay off a little bit of the taxes every month for a period until it is completely paid off. Or, a taxpayer might enter into a contract with the IRS to settle the debt for less than the full amount, referred to as an Offer in Compromise. These are just a few of the options available to taxpayers.

If you find yourself with a mountain of tax debt and you want to know what your options are, please give us a call at 301-250-0257 and we will figure out the solution that is best for you. For more information about tax collection options generally, please see my blog post The Pros and Cons of Common Tax Collection Solutions.