IRS Modernizes Collection: What’s Next for Tax Practitioners

Background

Early in his tenure, Treasury Secretary Scott Bessent indicated that collection work, improved IT capabilities, and customer service would be at the center of the IRS’s focus for the foreseeable future. Bessent even added that the IRS plans to “enhance” collection efforts using artificial intelligence and machine learning.

The IRS made clear in its Fiscal Year 2026 Lapsed Appropriations Contingency Plan, released in October, how integral the agency views its collection operations. And while large swaths of IRS enforcement employees were furloughed during the recent government shutdown (or relegated to critical administrative processes), the largest contingent of collection personnel—the Automated Collection System (ACS) and Collection Special Compliance Personnel (SCP) teams—were largely unaffected. Collection notices and automated enforcement activities (liens, levies, and the passport program) activities continued, apparently unabated, during the shutdown.

The IRS placing such a heavy emphasis on collection efforts, as audit levels are anticipated to decline, is a strong sign that tax practitioners need to be prepared for a shifting landscape in 2026 and likely beyond. This is particularly true with the agency investing resources into enhancing collection systems capabilities using AI, as well as new and significant cases, including the Supreme Court’s ruling in Zuch v. Commissioner last June.

Enhancing IRS Collection with Tech

IRS Collection has for years embraced cutting edge tech and innovative approaches in how it identifies and communicates with taxpayers. Advanced decision analytics have continuously improved how individual and business taxpayers are sequenced for treatment and have resulted in predictive scores for the likelihood of being collectible (or not). The IRS is selecting cases for tailored treatments designed to collect the revenue for the least cost to the public.

At least since 2017, IRS Collection and Research Analysis and Applied Statistics (RAAS) analysts have continuously monitored results of redesigned collection notices. While revisions and improvements were achieved, they’ve happened over several months and years. With larger data sets digested rapidly using predictive and decision analytics with augmented AI, future improvements will likely happen in days and weeks.

The IRS already has proven adept at using AI functionality. In 2021, IRS Collection was the first civil division of the IRS to implement AI technologies to securely interact with taxpayers, allowing them to access their private accounts and establish pay plans and secure transcripts. Natural language processing voice bots have fielded millions of phone calls (without waiting on hold) and already established a value of pay plans at least ten times the $13 million cost of the program. And the return on investment just continues to grow.

The cost savings potential is enormous, as adding additional language offerings (beyond the current English and Spanish versions) will cost a fraction of historic IRS costs addressing numerous languages across an increasingly diverse pool of taxpayers. What will this mean for IRS’s venerable century-plus use of field revenue officers? Their role will still be prominent but could be limited to the most difficult cases—business employment taxes, potential fraud, and noncompliance by high-wealth taxpayers with large balances due or haven’t filed.

This is a niche that requires civil field investigations and cannot be filled by bots and AI. The untapped potential from using AI to strengthen the agency’s collection efforts is seemingly great. The IRS has just begun its journey.

New Legal Landscape

The recent Zuch Supreme Court case also has changed how the IRS, taxpayers, and tax practitioners, will interact with one another going forward. In an 8-to-1 majority ruling, the court held that taxpayers do not have the right to contest a liability through a collection due process (CDP) challenge in the US Tax Court if the IRS no longer intends to pursue a levy (because the tax balance due is satisfied).

CDP liability dispute rights become more relevant as the IRS increasingly challenges liabilities through notices without deficiency procedures.

Taxpayers generally receive a number of notices before a CDP notice, each one with more urgent and intimidating language. The earlier notices do not create CDP rights for the taxpayer, only the final one (issued before the IRS can seize bank accounts and physical property) does that. If waiting for such a notice was not scary enough, enter the US Supreme Court and Zuch.

Recently introduced legislation could remedy the issue of taxpayers who no longer have a tax liability not having an administrative CDP appeal right. Until then, the Supreme Court’s ruling in Zuch maintains the status quo, where IRS Appeals’ procedures preclude a de novo review of a liability dispute.

As the IRS pursues more automated processes with fewer people, how many more IRS notices will not include deficiency procedures and limit taxpayers to CDP or a suit for refund action? Time will tell, but in addition to Employee Retention Credit (ERC) reclamation actions, math error notices are likely to be enhanced and proliferate in the future as such errors are currently disputable in the CDP arena.

Examples of Change

As a result of the IRS’s heightened focus on collection efforts, as well as the recent Zuch decision, myriad taxpayers have found themselves slipping into the collection stream in ways that surprise them and their counsel.

ERC reclamation. In one example, a government contractor was forced to respond when an ERC reclamation action involved a timely protest inadvertently missed by the IRS. The case moved quickly to collection notices and premature levy action through the Federal Payment Levy Program (FPLP).

For federal contractors, the FPLP levy is “simultaneous” with the CDP notice. CDP rights are not granted before levy action, and subsequently requesting a CDP or Equivalent Hearing is not a basis to reverse FPLP status or release the levy. While the IRS eventually verified the FPLP levy was premature and reversed the determination, it took weeks for the Bureau of the Fiscal Service (BFS) to acknowledge the reversal and months to issue refunds—partly due to the recent shutdown.

During that time, BFS offset nearly $1 million dollars in defense contracts, bringing the tax balance to zero. The IRS’s error warranted those manual refunds, and the balance due will be restored, permitting the business to prove they qualified for the ERC amount claimed in a CDP Equivalent Hearing. This will avoid the necessity of the taxpayer bringing a possible lawsuit for refund. Other businesses, however, may not be as fortunate.

The FPLP program was launched in 2000, and perhaps it is time to revisit some of the system’s limitations when addressing an erroneous/premature levy (especially during a government shutdown). In the case here, the business survived, and jobs weren’t lost, but only because the business had reserves and credit sufficient to stay above water while the IRS remedied the unfortunate situation.

General business credits. A second example involved two separate businesses where the IRS overlooked the taxpayers’ general business credits even though they were included in their filed corporate income tax returns. Instead of refunds due for both businesses, the taxpayers received notices advising they owed substantial sums, with no administrative appeal rights with the IRS. As a result, the taxpayers moved quickly into the collection notice stream and received CP 504B final notices.

The taxpayers explained to the IRS that they each were owed a refund and that collection needed to be suspended while the agency revisited the error in processing their returns. While not a CDP notice, both businesses had large federal payments due to them and needed to avoid the FPLP process. A FPLP “block” was requested and put in place on IRS systems as a FPLP levy was imminent. This opened options to either work with the IRS to resolve the processing error, and if not resolved, await CDP rights and dispute the liability in collection.

How Practitioners Can Adapt

Taxpayers slipping into the collection stream can be frightful for the uninitiated—for many clients we are seeing, it is their first encounter. Practitioners should be ready, particularly in this new IRS environment, to handle circumstances like the ones described above.

There’s a phrase that is always applicable when you’re representing a client assigned to the IRS Collection Operations (notices, campus, or the field): “Timing is everything!” Generally, speaking, there are several weeks between each notice. The earlier the IRS gets a sufficient response to a notice, the less likely enforcement will occur, and resolution options are broader.

In addition, where deficiency procedures are not available, the CDP (created by the IRS Restructuring and Reform Act of 1998) is an excellent alternative and often less costly and time-consuming than refund litigation. Practitioners can dispute the liability on behalf of their clients if the taxpayer had no prior opportunity and an exam subject matter expert in the IRS Independent Office of Appeals will review your protest. If unsuccessful in Appeals, then the taxpayer has a ticket to have the matter reviewed at the US Tax Court—if the CDP request was timely.

While notice of levy is a collection action to be taken seriously, so is the filing of a Notice of Federal Tax Lien (NFTL). This is one of the most prolific and early enforcement activities taken by Collection. For individual and business taxpayers with sensitive licenses and/or clearances, the NFTL could prove detrimental. Strategizing with the client to evaluate the risk level is critical. Similar to a FPLP levy notice, the right to a §6320 (lien) CDP hearing comes simultaneously with the NFTL filing. While you can dispute the underlying liability in the NFTL CDP hearing, you want to avoid the lien in the first place if it will cost you your clearance or destroy your business.

The very first collection notices or the CP 504/504B will be an opportunity to request a Collection Appeal Program hearing where you can ask a lien not be filed and offer collateral in lieu of the lien or otherwise attempt a sufficient argument why collection will be enhanced by not filing the NFTL. Recent examples seen included a large agricultural business (receiving government subsidies) that needed three years to repay an ERC claw-back liability, and also a multi-state restaurant chain with a liquor license (contingent on no tax liens) needed four years to repay. The IRS was amenable to resolutions that avoided the lien, for both.

Takeaway

As our tax administration gets back into full swing following the longest shutdown in American history, it will be important to observe the IRS’s enforcement priorities and see where funding is utilized. This could be in one of several areas: IT, hiring in the Collection units, or even strengthening examination resources.

In 2024, the IRS registered $98 billion in “enforcement revenue,” an all-time record, and Collection accounted for the vast majority of it—especially Collection notices. As a sure revenue generator with significant ROI, the priority on Collection makes a lot of sense. The largest part of the tax gap is underreporting, though, and also will get attention.

Given Bessent’s stated focus on collection, and also his comments about determining how Exam chooses which taxpayers to audit, a common denominator is obvious. Both will significantly benefit from accelerated acquisition and the use of advanced predictive and decision analytics, augmented by AI. And tax practitioners should be ready for this new landscape.