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The IRS doesn’t forget or forgive tax debts, so if you skipped paying federal taxes in the last ten years, at one point, the agency will send you Notice CP501. The notice is part of a series of letters the IRS sends to taxpayers before initiating a collection action.
During the pandemic, the IRS reduced its collection activities. Notice CP501 can catch you by surprise if you underpaid federal taxes in the last few years but have not received any correspondence from the IRS since.
The IRS intends to intensify its collection efforts after the pandemic, which is why a growing number of taxpayers are getting Notice CP501 in 2023.
The statute of limitations for tax debt collection expires after ten years, meaning that the reason you’re getting this notice could be the debt from 2018 or earlier.
This article will explain what you should do if you receive IRS Notice CP501 in 2023.
Table of Contents
A Quick Introduction to IRS Correspondence
Notice CP501 isn’t the first notice the IRS sends to taxpayers who owe taxes. You’ll only get this notice if you don’t respond to Notice CP14, which informs you that you have taxes due and instructs you to pay the amount you owe before a specific date.
Like Notice CP14, Notice CP501 doesn’t indicate that the IRS intends to levy your bank account, place a lien on your property, or take a similar action.
However, they will continue sending you notices if they don’t receive your response by the deadline specified in Notice CP501.
This notice is usually sent to taxpayers in the Automated Collection System (ACS). But that doesn’t mean the IRS intends to garnish your Social Security or seize your wages automatically. On the other hand, Notice CP14 is usually sent by a revenue office.
An Overview of IRS Notice CP501
The information in Notice CP501 refers to the amount you owe, how much time you have to settle the tax debt and your payment options.
The notice’s first page shows your name and address, and you can find the following information in the page’s upper right corner:
- Notice’s title
- Tax year
- Notice date
- Your taxpayer ID
- IRS contact number
The amount due and the tax year during which tax debt was accrued are also on the notice’s first page. The explanation of why the IRS sent you the Notice and what to do if you already paid the tax debt or entered the installment agreement is below the Amount Due section.
The Billing Summary section lists the amount you owe, interest, penalties, and payment due date. Taxpayers involved in a bankruptcy case are instructed to disregard the notice and informed that they won’t receive additional notices while the automatic stay is in effect.
The rest of the document tells you what the IRS wants you to do and presents your payment options. The notice’s last few pages provide information about civil penalties and interest assessed to your account.
The IRS will charge the failure-to-pay penalty if you file a tax return for a certain year. But if you don’t file a tax return or miss the filing deadline, the agency will also assess the failure-to-file penalty.
The document shows the monthly penalty rate and lists the circumstances under which taxpayers can reduce or remove penalties from their tax liability.
What to Do When You Receive IRS Notice CP501?
The first thing you should do when you get IRS Notice CP501 is read it and establish its authenticity. If the notice isn’t fake, you must double-check if the due amount is accurate to determine what to do next.
Although the notice urges taxpayers to settle their tax debt immediately, it also provides guidelines to taxpayers who can’t pay the entire amount in full.
The payment is usually due 21 days after the notice date, but you’ll have only ten days to settle the debt if the amount owed is over $100,000.
The course of action you should take depends on whether you agree or disagree with the amount due.
1. Paying the Taxes Due or Setting Up a Payment Plan
Taxpayers who agree with the debt amount should pay their bill before the date indicated on Notice CP501. You can either pay online on the IRS website or mail a check or money order with the payment stub to the IRS.
You’ll have the following options if you cannot pay the entire tax debt amount:
- Set up an installment agreement with the IRS. The payment method usually involves repaying the debt in monthly installments within 72 months.
- Apply for an offer in compromise if you cannot make monthly payments. The amount you should offer in compromise depends on various factors. The IRS might reject your application if the amount you offer is too low.
- Obtain the currently not collectible status. You’ll still owe taxes, but the IRS will stop charging interest and penalties if your application for this status is approved.
- Request penalty abatement. You must explain why each penalty should be removed from your account to the IRS.
2. Disputing the Assessed Tax Debt and Penalties
You must call the number on Notice CP501 if you disagree with the amount due or think some or all of the information in the notice is incorrect.
The IRS will review your account and amend its assessment of your tax debt if it determines that the due amount or penalty rates weren’t calculated correctly.
Also, if you don’t agree with the amount due, you can send a written protest to the IRS via their Collections Appeal Program. The appeal should be filed before a lien is placed on your property.
The Consequences of Ignoring IRS Notice CP501
Not responding to Notice CP501 is the worst course of action because the IRS will continue to charge penalties and interest and send you notices. You’ll get the second reminder, Notice CP503, if you don’t respond to Notice CP501 within thirty days.
The IRS will send you the so-called Final Notice CP504 before mailing Letter 1058 or Notice LT11 Final Notice of Intent to Levy. Each notice will arrive four to six weeks after the previous one, giving you approximately three weeks to pay the tax debt or contact the IRS.
Meanwhile, your tax liability will continue to grow due to increasing penalties and interests, so ignoring IRS Notice CP501 will guarantee that you’ll end up owing more than the amount indicated on the notice.
It’s also worth noting that the IRS can place a lien on your property any moment after they send you Notice CP501, which can hurt your chances of refinancing a loan or securing a mortgage.
FAQ’s
Notice CP501 doesn’t request your personal information or indicate that you must use a specific payment method. Contact the IRS immediately if you suspect that Notice CP501 you received is fake.
The IRS will assume you agree with the balance due and other information in Notice CP501 if you don’t call the number on the notice and explain why you disagree with the assessed tax debt.
Notice CP501 is sent automatically to taxpayers in the ACS. As a result, the IRS won’t assign an agent to your case, and you’ll speak with a different person each time you call the number on the notice.
You can mail the proof of payment to the address on the envelope included with Notice CP501.
Choosing the Best Way to Respond to IRS Notice CP501
Receiving Notice CP501 means that the IRS intends to collect your federal tax debt, even though they may have neglected it for years. Ignoring the notice can only make matters worse and increase your tax liability.
Hence, you must respond promptly and find the best way to manage the debt if you cannot pay the full amount.
Consider filing Form 911 and requesting Tax Advocate Service assistance if you don’t feel comfortable negotiating the terms of an installment agreement or offer in compromise with the IRS. Please visit choicetaxrelief.com or call 866-8000-TAX to speak with a CPA who can help you find the best way to respond to IRS Notice CP501.
Author:
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.
