What Does IRS Notice CP501 Mean & What to Do?

June 3, 2023 | Tax Debt | Tax Help

CP501 is one of the first notices that you will receive if you owe taxes to the IRS. Usually, the agency sends out CP501 notices to taxpayers whose accounts are in the automated collection system (ACS). In contrast, other notices, such as the CP14, may come from the ACS or a revenue officer. This notice is a demand for payment. It doesn’t threaten any advanced collection actions such as asset seizures or wage garnishments, but if you ignore it, you will start to receive those types of notices. Want to get help with your tax debt today? Then contact us at the Timothy S. Hart Law Group, P.C., and we’ll help you make arrangements with the IRS.

What Is CP501 From the IRS?

CP501 is a demand for payment from the IRS. It notes your unpaid taxes, interest, and penalties. It outlines some payment options and lets you know what you should do if you disagree with the notice. This letter also advises that the consequences can be severe if you don’t pay your taxes.

What to Do If You Get CP501

If you get CP501, you should pay your tax bill in full or contact the IRS to make arrangements for your tax debt. If you disagree with the notice, you can dispute it. Here is a more detailed look at the various options.

If you disagree with the tax debt

The CP501 notice says that if you disagree with the tax debt, you should contact the IRS. The notice doesn’t go into additional details, but there are several different ways to dispute a tax bill, including the following:
  • If the bill is due to actions your spouse took without your knowledge — apply for innocent spouse relief.
  • If the tax assessment is incorrectappeal the tax assessment, or pay the tax under protest and request a refund if you missed the deadline to appeal.
  • If there’s a legitimate doubt that you owe the tax — request an offer in compromise based on doubt as to liability.
  • If the penalties are incorrect — explain why the penalties shouldn’t have been applied, and ask for penalty abatement if the penalties were assessed correctly.

If you agree with the tax debt

To avoid any more penalties or interest, you need to pay the tax bill in full by the date on the notice. Usually, that’s 21 days after you receive it. If you can’t afford to pay in full, here are the opinions:
  • If you want to reduce the penalties — request penalty abatement and then make arrangements for the remaining balance.
  • If you can make monthly payments — set up an installment agreement.
  • If you can’t afford monthly payments — look into a tax settlement or currently not collectible status.
Depending on your unique situation, there may be a better option. When you contact a tax attorney, they will help you find the best resolution for your unique situation.

What to Expect If You Receive IRS Notice CP501

If you receive this notice, it means that the IRS is going to start sending you more notices and taking collection actions against you. The IRS did not send out this notice for well over a year, but it plans to start sending these notices again in mid-2023. This can be very confusing for taxpayers. Millions of taxpayers filed tax returns in 2018, 2019, 2020, or 2021 and didn’t pay, and even though a lot of time has passed, they haven’t heard from the IRS. Often, people think this means the agency has forgotten about the debt. However, that’s not what happened. The agency slowed down collection actions during COVID. It also stopped sending out many automated notices because it didn’t want taxpayers to call in and jam up the phone lines. However, the agency has 10 years to collect unpaid taxes, and after letting some time go by, the IRS is likely to get very serious. For instance, if you owe taxes from 2018, the agency only has until 2029 to collect them. Even if the agency lets a few years pass and doesn’t send you a notice until 2023, it’s going to increase its focus on collections for the next six years.

What If You Ignore CP501

If you ignore Notice CP501, the IRS will send you another demand for payment (CP503). Then, it will send you an intent to levy (CP504), and finally, it will send out LT11 (Final Notice of Intent to Levy and Your Notice of a Right to a Hearing). Typically, IRS letters come on a six-week cycle. That means that once you receive Notice CP501, the game is on, and the other notices will start coming fast and furiously. Once you receive LT11, you typically have 30 days to respond or the IRS will move forward with a levy. This may include garnishing your wages, taking the money in your bank account, or seizing your assets. The IRS may also issue a tax lien against your assets. The agency has a right to do this anytime after it sends you the first notice of payment due. The IRS doesn’t have to send any specific notices about tax liens. Usually, the IRS only issues a tax lien if you owe $10,000 or more, but it has the right to issue liens for any amount of tax debt. Additionally, the agency will take your tax refunds. If you have unpaid taxes, the IRS can seize your full refund, or it can reduce your refund by the amount that you owe. It can also take your state tax refunds through the Treasury Offset Program.

Do You Need to Worry About Automated Collection Notices?

You may have noticed that this notice comes from the automated collection system (ACS), but just because it’s an automated notice doesn’t mean that it’s benign. The IRS’s ACS sends out a range of notices, including intent to levy notices. Some people think that because a human isn’t monitoring their account that they don’t have to worry about this notice. However, that isn’t true. This notice can lead to much more serious collection actions, and all of them can be initiated through the ACS. Counterintuitively, it can also be harder to deal with the ACS than an actual IRS agent. For example, when an agent is assigned to your account, you get to work with them directly, and they know what’s happening in your case. In contrast, when you call the IRS after receiving a CP501 notice, your call will be routed to the people who work in ACS. You will speak with a random person every time you call, and they won’t have any background knowledge about your situation.

Get Help With CP501

Have you received notice CP501? Wondering what you should do? Worried about the IRS taking additional collection actions? Then, it’s time to reach out for help. From my experience, the IRS does make a strong effort to notify taxpayers when issues exist with their tax account through IRS tax notices. Most of the IRS notices are standardized forms that can range from you having unreported income to having a refund on your tax return that is different than what your tax return states. The IRS is very good about using the mail to notify taxpayers, so do not be fooled if a person calls you on the phone and acts like they are from the IRS. This is likley a person just trying to impersonate the IRS to steal your money. However, if you receive such a call, remain polite but do not give out any personal information. Since the IRS uses mail and a primary method to reach taxpayers, it is important to keep your address with them current. Your response to the IRS issue contained in the notice needs to be tailored to the issues involved. Often, I find that you have to clear and concise when responding to IRS notices to make any progress in resolving the issue. Once your US tax Court rights expire,  the IRS can begin collection efforts, such asking for payments and invoking their right to levy and lien your property. Therefore, it is very important to respond to the notices to get in front of the issue before it becomes unmanageable. In conclusion, if the IRS sends you a notice, it is always best to review the notice and take action. If you are not comfortable responding to the notice yourself, hiring a tax professional who can assist with the response makes sense. It is important to realize that the notices have strict time deadlines that need to be met. Timothy Hart Law Group is focused specifically on helping people deal with the IRS and state tax agencies. We focus on tax problems which means that we can provide all of our clients with the personalized support and guidance they need. This notice means that the agency is no longer ignoring the situation. Even though months or years may have passed between when you filed your taxes and the IRS sent this notice, there probably won’t be another lull. Once this notice comes, the collection process has started, and to protect yourself and your assets, you need to take action now.

Attorney Timothy Hart

Timothy S Hart, the founding partner of the tax law firm of Timothy S. Hart Law Group, P.C. is both a New York Tax Lawyer & Certified Public Accountant. His area of expertise includes innovative solutions to solve your Internal Revenue Service and New York State tax problems, including tax settlements through the Federal and New York State offer in compromise programs, filing unfiled tax returns, voluntary disclosures, tax audits, and criminal investigations. [ Attorney Bio ]