Mentioning the IRS in Debtor Communications
According to research by Atradius, in the US 39 percent of invoices are paid late and 48 percent of customers delay making their payments. Some of these delays are innocuous or are caused by legitimate reasons. The other reason for non-payment is the belief that you cannot enforce obligations. This ends now!
The direct communication method is the most effective way to express that you will involve the IRS if a debt is not paid. By stating your intention to be paid and willingness to involve the IRS, your claim moves up the debtor’s priority list.
When Should You Use This Highly Aggressive Letter?
The IRS Advantage™ strategy is a collection technique that uses a highly aggressive collection letter and should therefore be used as a last resort to collect monies that have proven to be otherwise uncollectible. Typically, debts that fall into this category are more than 120 days past due, debtors are unresponsive, and the prospect of getting paid appears non-existent. Essentially, as a creditor attempting to collect the “uncollectible,” you’ll find that the IRS Advantage™ letter and strategy can be your Ace in the hole.
How Does the IRS Advantage™ Strategy Work?
This strategy works by making the debtor aware that a debt cancellation is actually the equivalent of taxable income to the debtor in the eyes of the IRS. Whether you telephone your debtor with this information or send them our aggressive collection letter — via certified mail or another traceable method of delivery — accompanied by the W-9 form they are required by law to fill out, you will be clearly informing them that you intend to send them an IRS Form 1099-C in the amount of the debt, which they’ll be required to include as income when they file their individual or corporate income tax return.
This prospect will cause many debtors to settle up — not only because they would otherwise be required to pay taxes on the additional “income,” but also because reporting debt cancellation income can make them a more likely target for an IRS audit. The good news for you is that in the event that they don’t pay up, issuing a 1099 as part of this strategy will not prevent you from continuing your attempts to collect the debt.
What Are the Possible Pitfalls of This Collection Technique?
The IRS Advantage™ technique is a highly innovative strategy for getting your severely delinquent customer’s attention and providing a strong incentive to settle the debt that will otherwise be reported to the IRS as income. However, it’s important to understand that because it’s based on IRS rules, this collection technique is complex and must be carried out with care, understanding, and skill in order not to run afoul of IRS rules. Here are two issues you must be careful to handle correctly in attempting to collect the debt in question:
- You must understand the rule that states you may not use the IRS as a threat to intimidate your debtor into paying the monies owed. The IRS Advantage™ letter is simply a business transaction whereby you notify your debtor of an existing situation that, unless handled in the appropriate manner, will naturally lead to a specific action that you will be forced, by the debtor’s inaction, to carry out.
- You must also make sure you actually own the debt before using this technique to collect it, as you are prohibited by law from sending this letter to a debtor on behalf of a client.
We Can Help with the Complexity & Ambiguity of IRS Reg S1.61.12
The IRS Advantage™ letters, emails, faxes and phone calls are extremely aggressive. In the simplest of terms, this collection strategy is based on a combination of accounting principles and debtor psychology. However, IRS Reg S1.61.12 is ambiguous in that there are no definitive guidelines as to what’s required and what’s prohibited in the realm of debt cancellation income and issuance of IRS Form 1099-C.
And therein stands the foundation of this powerful collection tactic. However, some find it complex to the point that they fail to use it. If you find yourself in this category, we can help you implement the letter templates, phone scripts and strategy, or you can ask for assistance from one of our experienced negotiators, who use this technique on a regular basis.
When You Need the Most Aggressive Collection Letter Possible
Our IRS Advantage™ Guide can equip you to create and use your own version of this powerful letter that’s specially tailored to your needs. It will lead you through the process step by step. However, because this concept and process are so complex and so innovative — and because there are a few potential pitfalls — we’d like to help ensure that you’re using it correctly.
To submit your request to download this letter and tutorial, please contact Ben Ricci directly. You’ll find a convenient form for this purpose in the IRS Advantage™ portion of our Collection Letters page. When you need the most aggressive collection letter possible, let us help you get the most out of a commercial collection strategy that has the potential to turn your most stubborn collection failures into your most satisfying successes.
At Stevens & Ricci, all our D-I-Y Tips & Guides are designed to help you Collect Money, Sooner, at Less Cost, and Without Losing Valued Customers