LT38: Resumption of IRS Collections and 2020/2021 Penalty Waivers

Man recieves LT38 notice from IRS in the mail

If you owe back taxes to the IRS, you may not have received any letters for the last couple of years. That’s not because the IRS forgot about your bill. It’s because the agency paused many collection notices and actions during and after the COVID-19 pandemic.

But now, the IRS is back in full force. The agency has more funding, and it’s getting ready to go after individuals and businesses who owe back taxes. The LT38 notice is just the first step. You don’t need to panic about this letter, but take it as a call to action that you should do something soon.

Want to address your tax debt and learn your options for the best path forward? Then, contact us at Wiggam Law today. Our tax attorneys can help you with any IRS or state tax problems.

What Does LT38 Say?

At the very top of the notice, you’ll see a sentence that says something along the lines of “You owe back taxes, but the IRS has options to help you.” Then, the rest of the letter outlines how much you owe in tax, penalties, and interest from each tax period.

The notice also explains that qualifying taxpayers received penalty abatement for the 2020 and 2021 tax years due to the pandemic-related penalty relief program that issues automatic relief for failure to pay penalties. LT38 also outlines that if you don’t take action soon, penalties and interest will continue to accrue on your account, and it mentions that the IRS plans to start sending out more collection letters soon.

Penalty Relief on LT38

When you look at the chart in the middle of the letter, you should see your failure-to-pay penalties for every return that you filed late. If you have qualifying taxes from 2020 or 2021, you should not see any failure-to-pay penalties in those boxes. As mentioned above, the IRS has decided to offer automatic penalty relief to taxpayers with assessed balances of $100,000 or less from those two years.

You will not see penalty abatement for any other tax years. You also won’t see penalty removal if your assessed balance is over the $100,000 assessed tax threshold. Additionally, the penalty relief only applies to the failure-to-pay penalty, not to the failure-to-file penalty.

The Resumption of Collection Actions

Once the IRS gets this letter out to taxpayers with delinquent tax liabilities, it will start sending other collection notices. Some of the notices that you can expect to see in the near future include:

  • CP14 – Notice of tax debt balance due.
  • CP501 – Reminder of tax debt balance due.
  • CP503 – Second reminder of balance due.
  • CP504 – IRS levy of state tax refund and warning of future property levies.
  • Final Notice of Intent to Levy With Right to Appeal – Several different notices fit into this category. Once you receive this notice, you have 30 days to appeal, or the IRS will start garnishing your wages, bank accounts, or other assets.

If you have unfiled returns, the IRS will also start sending out notices telling you to file. If you don’t, the agency may generate a substitute for return and assess tax against you. Then, the agency can start collections against you.

How to Respond to LT38

To avoid more penalties or adverse actions from the IRS, make sure you reach out to the IRS about your tax debt. If you have the funds to pay in full, you can use the QR code on the notice to navigate to the IRS website. There, you can make payments with ACH transfers or credit/debit cards.

If you cannot pay in full, you should contact the IRS about one of the following payment plans and/or relief options. A tax attorney can help you select the best option for your situation:

  • Penalty Abatement – If you didn’t qualify for automatic penalty relief, consider requesting abatement. Worst case, the IRS will say no, but it’s always worth asking. You can apply for penalty abatement as well as setting up a payment plan or making other arrangements.
  • Installment Agreement – You make monthly payments up to the collection statute expiration date (usually ten years after the return’s due date or filing date). Note that if your balance is over a certain threshold or if you cannot make the minimum monthly payments, you will generally need to submit a financial disclosure, typically by completing and sending in Form 433-D.
  • Offer in Compromise – With an OIC, the IRS lets you settle your tax debt in a lump sum based on your equity in assets and disposable income. This program requires a lengthy application with nearly every detail about your finances.

What if you already paid in full?

If you paid in full sometime during the last three weeks, the IRS says that you should disregard this notice. If you paid in full before three weeks ago, make sure the payment cleared your bank. Then, contact the IRS to ensure the payment gets credited to your account.

What if you disagree?

Do you disagree with the tax due shown on the return? Do you believe that the IRS has miscalculated your penalties? In these cases, you need to appeal or contest the tax. Your options vary based on the situation, but they may include innocent spouse relief, OIC based on doubt as to liability, and paying the tax under protest and then requesting a refund. These are only some of the resolution options that may be available to you, and you should contact a tax attorney if you believe that the IRS has mistakenly assessed you with a tax liability.

What if you can’t pay anything?

What if you can’t pay anything? Will the IRS put you in jail? Or take your home? Luckily, no.

If you have tax debt that you truly cannot afford to pay, consider looking into the currently not collectible option. In short, you provide a financial disclosure. Once the IRS sees that you have no disposable income or assets, the agency stops all collection actions against you until your finances improve.

What if You Ignore LT38?

If you ignore this letter, expect to see more serious letters in your mailbox soon. Your tax bill will also grow. Interest and penalties accrue on IRS tax debts, and the two main penalties (failure to file and failure to pay) can get up to almost 50% of your balance. If you qualify for penalty abatement, the IRS will start adding new penalties to your account on April 1, 2024.

What to Do if You Don’t Qualify for Automatic Penalty Relief

Again, only certain taxpayers qualify for IRS penalty relief on LT38. You generally don’t qualify in the following situations:

  • Your assessed taxes for 2020 or 2021 are over $100,000.
  • You have tax liabilities from other years (for example, tax year 2022 and/or tax years before 2020).
  • You incurred a failure-to-file penalty.

However, you may still be able to qualify for relief. If these are your first penalties and you are normally compliant, consider requesting first-time penalty abatement. If you filed/paid late due to reasonable cause such as death or serious illness, let the IRS know and request reasonable cause penalty abatement.

What Does Say?

If you receive LT38, you may see the short URL Nearly every IRS notice has a short URL that directs to an IRS webpage about the letter.

The IRS’s webpage about LT38 informs you on how to reach the IRS if you have questions. It also reminds you to read the notice carefully, file outstanding tax returns, and pay the unpaid balance. Then, the webpage has a list of FAQs. They explain your options if you can’t afford to pay in full, what to do if you’ve already paid in full, and how to deal with financial hardship. The page also explains how penalties work and the criteria for automatic penalty waivers.

Get Back Into Good Standing With the IRS

Getting behind on paying your taxes can be very stressful, and it impacts your finances in many ways. You may not be able to get loans, and if you don’t pay, the IRS will eventually start garnishing your wages and/or seizing your financial accounts, personal and business property, and real estate.

Don’t wait for the situation to get worse. When you receive LT38, take advantage of the penalty abatement and use this opportunity to get back into good standing with the IRS. To get help and learn about the best options for your personal situation, contact us at Wiggam Law today.