What is a CP501 Notice?
A CP501 Notice is a bill from the Internal Revenue Service (IRS) detailing a tax liability. An IRS CP501 is a written, official reminder that states how much you owe in back taxes for a given year. Taking action upon receiving your CP501 notice is paramount to avoid further complications, namely legal proceedings from the IRS. In this way, receiving notice CP501 in the mail is a blessing in disguise, as it allows you to right your wrongs and steer clear of litigation.
Why did I receive a CP501 Notice?
When you file your income tax return each year, you either:
- Receive a refund from the IRS in the case of overpayment
- Break even in the sense that your payments match what you owed
- Owe the IRS money
A Reminder of What You Owe
Receiving a CP501 Notice in the mail reminds you how much you owe the IRS. To resolve the issue, you must act quickly. Penalties and interest will increase with time. In short, the longer you wait, the more you will owe.
The good news is that a notice CP501 is a straightforward document designed to best assist you in paying your debt. Your CP501 notice has all you need to make a payment. You will find the following details:
- the amount owed
- the tax year
- a Caller ID
- instructions for payment, including who to write the check out to and where to send it, in addition to a deadline to avoid the aforementioned additional fees.
How Do I Make a CP501 Payment?
The first step to settling your debt with the IRS is to verify the information on your notice CP501.
If I Agree with the Amount Due
If you agree with the previously listed details, follow the directions in the Response section before the disclosed due date.
If I Disagree with the Amount Due
If you disagree with the claim, specifically the amount of money that is due, contact the IRS at your earliest convenience to dispute the balance owed. You should also contact the IRS if you need to make a payment plan in order to cover your tax debt.
There are thus three ways to react to a CP501 Notice:
What if I Can’t Afford a CP501 Payment?
No matter what your situation is, act quickly. If you cannot afford to pay the amount that you owe, make sure to contact the IRS as soon as possible. Although payment arrangements exist, you should know that interest and penalties continue to be added to your outstanding balance. As long as the debt remains unpaid in full, interest and penalties will accrue from the original due date.
Statute of Limitations on Tax Collection
These fees will continue to increase until your case reaches the IRS statute of limitations on tax collection, commonly known as the Collection Statute Expiration Date (CSED). This is the date after which the IRS can no longer pursue a collection action and the debt is cleared.
Generally speaking, the IRS has ten years to seek payment on back taxes. The CSED clock starts ticking on the date the IRS establishes your tax liability. Keep in mind that the IRS will pursue taxpayers more aggressively as a CSED nears.
IRS Installment Agreement
The IRS offers an installment plan that allows for monthly payments. This is the most common option for people struggling to cover the unpaid taxes described in notice CP501. Ideally, the agreement you reach with the IRS will cover the interest and estimated tax penalties that have and will continue to increase your bill. To this end, different types of plans exist for different financial situations.
The most common is the Guaranteed Installment Agreements. To qualify, you must be an individual with an outstanding balance of $10,000 or less. You are required to pay back the amount due plus time-sensitive penalties within three years or by the CSED.
While the Guaranteed Installment Agreement is considered the standard installment plan available, others exist. These include:
- Streamlined Installment Agreements
- Financially Verified Installment Agreements
- Partial Payment Installment Agreements
- Direct Debit Installment Agreements
Offer in Compromise
Installment payments may not be suitable for some people. Though rare, an offer in compromise allows you to pay the IRS less than the total amount you owe. Note that this payment status is not granted often, as the requirements that apply are strict and unique.
Offer in Compromise is one of the occasions when you can take action to suspend your CSED date. Other examples include but are not limited to:
- Innocent Spouse Relief
- CDP hearing
- Living abroad for six months
- Military deferment
- Taxpayer Assistance Order
If you can prove that the CP501 payment would cause financial hardship, the IRS is within its power to put a temporary stop on a collection action. IRS Hardship is also known as status 53.
Currently Not Collectible
IRS Hardship isn’t the only option for those struggling with back taxes. If monthly payments are beyond the scope of your financial capabilities, there exists a program that can relieve you of your tax debt entirely. The IRS reserves the currently not collectible (CNC) program for those in financial stress so great they cannot afford to pay any of the original debt plus penalties and interest. To be considered, you must prove that you are indeed in a situation where your income is less than your total expenses every year leading up to the CSED.
Note: be mindful that the CNC status can be retracted if your financial situation improves, at which point you may receive a notice CP501 once again with the expectation of paying your tax debt.
What if you don’t respond to Notice CP501?
There are serious consequences to ignoring a CP501 notice. The IRS can file a Notice of Federal Tax Lien that hamstrings your property or revokes you of your bank account. A tax lien may also hurt your credit rating as it will appear on credit reports.