An IRS CP501 Notice tells you that you have a balance due. It can be terrifying to receive a notice from the Internal Revenue Service (IRS). Many people assume that an IRS notice means they are in trouble with the government or the IRS intends to audit their tax returns. However, there are many notices the IRS sends to taxpayers. The first step is to remain calm and read the notice to determine what action you should take.
What Is an IRS CP501 Notice?
A CP501 is often called a “first notice” because it is typically the first letter the IRS sends to taxpayers when they have a balance due. The letter informs you that you owe the IRS money because of one of your tax accounts. In addition, the notice tells you how much money you owe, when the payment is due, and how to make the payment.
A CP501 Notice is a reminder from the IRS. The government is reminding you that you filed your tax return, but have not paid the balance due and ignored previous notices of a balance due. The letter puts you on formal notice that you must pay the debt, or the IRS will take further action to collect the debt.
How Do I Deal With a CP501 Notice?
When you receive a CP501 letter from the IRS, read the letter carefully and thoroughly. The IRS notice provides detailed information about the following:
- The balance you owe to the IRS
- The tax year for the balance OWED
- The date the balance must be paid
- What you should do if you disagree with the amount due
- Your payment options if you cannot pay the IRS debt in full
- What happens if you ignore the debt and fail to contact the IRS
- The penalties for failing to pay a debt to the IRS
If you have the funds to pay the entire balance of your back taxes shown on the CP501 Notice and agree with the amount, pay the debt by one of the methods listed in the notice. In most cases, taxpayers can pay by sending a check or money order through the mail or pay online. However, if you disagree with the notice of payment due, contact the IRS immediately to speak with an IRS agent. You might also consider discussing the notice with your tax preparer or a tax professional.
Typically, you can ignore an IRS CP501 Notice if you have paid your balance in full within the past 21 days or have entered an installment agreement with the IRS to repay the debt. Also, the notice is for information purposes only if you are currently in bankruptcy. Give the notice to your bankruptcy lawyer immediately.
What Happens if I Cannot Pay the Debt I Owe to the Internal Revenue Service?
Many people owe taxes that they cannot afford to pay. The IRS wants your money. Therefore, it has several options for you to pay the balance instead of taking drastic debt collection actions.
Ways that you can pay the balance due on an IRS CP501 Notice include:
IRS Payment Plan
An IRS payment plan is one of the most common ways taxpayers handle balances owed to the IRS that they cannot afford to pay in full. The IRS installment agreement lets you pay your taxes in monthly payments.
The IRS offers a short-term payment plan for individuals who can pay the balance in full within 180 days. It does not cost anything to set up a short-term payment plan. You can apply online, by phone, mail, or in person.
You can also request a long-term payment plan or IRS installment plan if you need more time to pay an IRS debt. Installment plans require a setup fee based on how you apply (the lowest fees are charged for online applications). The payments may be made through a Direct Debit Installment Agreement or paid online, by phone, or by mail.
Interest and penalties continue to accrue on the outstanding balances until the IRS debt is paid in full.
Offer in Compromise
You may also negotiate an offer in compromise with the IRS if you cannot pay your taxes in full. An offer in compromise settles your tax debt for less than you owe. To be eligible for an offer in compromise, you must have:
- Filed all tax returns due at the present time
- Paid the current year’s estimated tax payments
- Included at least one tax liability in the offer in compromise for a tax bill you received from the IRS
- Made the federal tax deposits for the past three quarters (if you are an employer)
- Met the requirements of one of the offers in compromise programs offered by the IRS
If the IRS accepts an offer in compromise, you pay a lump sum payment to settle the debt. In some cases, the IRS might allow you to pay the amount of an offer in compromise through a periodic payment plan.
Being Placed on Currently Not Collectible (CNC) Status
If you can prove that paying the debt shown on a CP501 Notice would put you in a financial hardship, you could qualify for a hardship collection delay. You must prove that paying the tax is impossible given your current financial situation. In other words, if you pay the IRS debt, you will not be able to pay your basic living expenses.
The IRS places a hold on your account and reports the account as currently not collectible. However, that does not mean you do not owe the IRS debt. Instead, the IRS delays collection efforts until your financial situation changes so that you can afford to pay the taxes you owe.
Delaying payment increases the amount of the tax debt because penalties and interest continue to accrue. Furthermore, the IRS may file a federal tax lien because of the unpaid taxes.
File Bankruptcy to Get Rid of the Tax Debt
Generally, bankruptcy does not discharge tax debts. However, there could be a few options to consider.
First, depending on the type of taxes you owe and the age of those taxes, the tax debt could be dischargeable in bankruptcy. If the tax debt is not dischargeable in bankruptcy, you might consider filing Chapter 13 to spread the tax debt over a 60-month bankruptcy plan. Learn more about how taxes are treated in a bankruptcy case by reading our article about taxes in bankruptcy.
What Happens If I Ignore an IRS CP501 Notice?
If you ignore an IRS CP501 Notice, the IRS can file a Notice of Federal Tax Lien to establish its priority status as a creditor. The tax lien attaches to all property you own. Therefore, you might be unable to sell your property or borrow against the property unless you pay off the IRS to release the tax lien. The lien is filed as a public notice so anyone can access the tax lien on record.
The amount of taxes you owe increases because of penalties and interest added to the account. The IRS could also take additional steps to collect the tax debt, including wage garnishments, property seizures, and bank account garnishment.
If you disagree with the IRS determination of debt, you need to dispute the debt immediately when you receive the notice. The notice contains instructions informing you how to challenge or appeal the debt. You can also seek advice from a tax professional and your tax preparer.
Whether you owe the IRS debt or not, ignoring a notice from the Internal Revenue Service is not advised. The consequences are much worse than if you face the problem directly.
Get Help With Your Debt Problems
At Ascend, we understand that facing the IRS can be frightening. Owing debts that you cannot afford to pay can be overwhelming. The good news is that we are here to help you.
Call or text us at (833) 272-3631 or contact us online for a free case evaluation. We assist you by reviewing several debt options to help you choose the best option to help you get out of debt. You do not have to face this problem alone.