IRS debt collection for tax that the IRS thinks is owed due to mistakes in tax return

Question

When I was younger (many years ago, had just turned 18 and moved out of my parents), I briefly worked in a company part-time while attending college. The college gave me a tuition scholarship and a tax document (form 1098 something, don't remember exactly which one) , which I put on my tax returns, because I was young and clueless and thought "hey they gave this to me to put it on my tax returns, and not including info is bad, right?" In truth, I should not have done so because my scholarship was not at all taxable (it was a full tuition scholarship which did not cover anything except tuition). The other dumb thing I did was thinking I could file my tax return myself and save money in the process.

I filed the taxes thinking everything was OK, and moved to a different address. Because I included my (non-taxable) scholarship on my return, the IRS felt I owed them taxes on it, and they sent mail to that previous address requesting payment. Alas, I had already moved out of that apartment and thus did not receive these letters from the IRS, nor did I file a change of address (don't forget, I was 19 and clueless).

I did not realize there was something awry with that tax return until much later, when I received calls from a debt collection agency, which is due clearly to this erroneously filed tax return.

I know that amended tax returns are a thing, but in this case, since the situation has already progressed to debt collection, what are my options? Is there still hope to "amend" this situation as I legally never owed taxes in the first place? Do I need a lawyer? What's the cheapest option? I'm not rich, certainly not enough to pay scholarship taxes that I never owed. Any suggestion is appreciated!

Answer 1

My initial answer (thinking you're being scammed, because that's how it sounds) is below.

In the comments you said that this is a tax return for 2016 and the amounts are significant enough for you to not just pay them off.

Amending a return is one option, but in this case it may be a bit too late. Usually, you'd amend it once the notice of deficiency came in and will send the copy of the amended return as your response to the notice. Once the statutory response period to the notice expired without your response, the debt became final. The IRS is not obligated to accept your amendment and cancel the debt.

I suggested to talk to a EA (Enrolled Agent) or a CPA licensed in your state to get more details about what you can do and how to handle it.

However, you may want to consider this as sunk cost and just pay it. You may want to have a conversation with that tax professional about "Offer in Compromise" (OIC) or a payment plan if the amount is too much to pay in one go, the IRS will generally not object (and depending on your situation may agree to give up some of the amounts, depending on your eligibility based on OIC rules). That wouldn't be because you shouldn't be paying at all, but because of your current financial situation.

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You're probably being scammed. The IRS doesn't sell debts to debt collection agencies.

The IRS collects tax debts itself, that is it's primary mission. The IRS is a law enforcement agency, and collecting tax debts is the enforcement of the tax laws (they also enforce criminal statutes related to tax evasion and such, ask Al Capone).

For tax collection, the statute of limitations is 10 years. That means that the IRS cannot collect debts older than 10 years (from when the IRS assessed the date, i.e.: the notice of deficiency was issued against you and the statutory period to contest has passed). See the lawyer's write up here.

There will never be a "debt collection agency" involved in collecting unpaid US Federal taxes, the IRS is the only agency. The IRS agents will not call and threaten you over the phone, and will not demand cash, or gift cards, or bitcoins, or wire to foreign accounts or anything else other than mailing a check to the IRS processing center. You can always call the IRS at 1-800-829-1040 to confirm any information anyone pretending to be from the IRS told you.

Additional information about the IRS collection process is outlined in the IRS Tax Topic 201.