We all try to stay on the good side of the IRS, but sometimes a financial hardship means you can’t pay the tax you owe.
If you owe money to the IRS and can’t afford to pay it, you have options. Like thousands of people every year, you should determine if you are eligible to defer payments on your tax debt. If the IRS agrees that you paying your taxes would impede a reasonable standard of living, it may grant your account an IRS Currently Not Collectible (CNC) status.
Forty-five percent (45%) of people who paid their tax debt couldn’t afford to pay for their Allowable Living Expenses. (Allowable living expenses refer to necessary living expenses such as food and clothing.)
What is IRS currently not collectible (CNC) status?
Also referred to as a hardship status, the IRS Currently Not Collectible status (CNC) provides temporary protection from taxation. It applies to taxpayers who cannot afford to pay their taxes and maintain their necessary living expenses. These individuals have federal tax owed that would create an economic hardship to repay, even under an installment agreement.
The IRS will delay federal tax collection activities without requiring an installment agreement while you’re under the protection of CNC status. CNC status also removes any levies on your wages or bank accounts.
Under the collection statute of limitations, the IRS has ten years from the date you first owed back taxes to collect the taxes, interest, and penalties. If your CNC status lasts beyond the ten-year mark, the tax bill disappears.
Do you qualify for IRS Currently Not Collectible Status?
If you are truly unable to pay your tax bill, your first step is to determine whether you qualify for CNC status. To do this, you must prove that you can’t pay your taxes and that forcible collection would cause severe financial hardship. You must submit very detailed financial information and file any missing tax returns from previous years. The IRS does not grant this status lightly.
Information for the IRS or your tax professional
When taxpayers cannot pay their tax debt – they have to prove their hardship to the IRS. Whether you work directly with the IRS, decipher the Internal Revenue Manual (IRM) on your own, or hire a tax expert, you will need to gather some basic information.
Collect your income tax returns and your monthly income information. The IRS will require verification of your disposable income from any source of income available to you. Next, make a list of your income and expenses. For items considered as necessary living expenses, the IRS has a cap on the allowance based on household size. When applying for CNC status, the IRS will evaluate your ability to pay tax debt based on the IRM guidelines.
The Internal Revenue Manual
The IRS Currently Not Collectible guidelines are laid out in the IRM. Section 5.16.1 of the IRM explains the goal of CNC status like this: “In certain circumstances, Collection personnel may determine that an account is currently uncollectible. By following the procedures in this IRM, employees will be able to properly and accurately close collection accounts as currently not collectible. All IRS personnel are responsible for the execution of duties in accordance with the Taxpayer Bill of Rights as listed in IRC 7803(a)(3).”
First, ask the IRS to file a Form 53, a Report of Currently Not Collectible Taxes. This is an internal form to the IRS. Depending on your circumstances, the IRS will request that you complete Form 433-A, Form 433-F, or 433-B (if filing as a business). Form 433-F, Collection Information Statement for Wage Earners and Self-Employed Individuals, instructs you on the minimum information required to receive a CNC status. If your tax bill exceeds $10,000, the IRS will likely request Form 433-A, a Collection Information Statement. Along with the 433-F, the 433-A provides a more detailed picture of your finances.
Should you contact a tax professional or tax attorney?
One look at the IRM probably will convince the average person to seek a tax professional’s help. The need for a tax attorney will depend on your specific circumstances. If you face a federal tax lien or are unable to qualify for currently not collectible status or an installment agreement – contact the tax attorney.
The IRS has provisions in place to address taxpayer tax issues. The faster someone contacts a tax expert, the better. Even if that tax expert is an IRS representative, they can help you start the process to qualify for CNC status. The IRM can help someone who has time to research and who understands IRS codes. The IRM is difficult for most people to understand. In most cases, the use of a tax professional will eliminate the stress of going it alone. It is the job of your tax expert to understand the IRM.
There are additional conditions if you have joint tax liabilities with a former spouse, you can be held responsible for paying the tax owed. A taxpayer must be cautious; a CNC status for one spouse does not extend the status to the other in a situation of joint liability. (188.8.131.52 (5)) There are many quirky conditions to CNC status so ask lots of questions.
Don’t expect the IRS to tell you that you qualify
There is no Internal Revenue Code definition of “low income.” However, 250% of the federal poverty level has been widely used as a definition for “low income” by Congress when determining eligibility for pro bono representation and by the IRS in setting a carve-out level for Social Security recipients.
Nevertheless, the IRS does not screen out taxpayers whose incomes are so low that they would be eligible for “Currently Not Collectible-Hardship.” According to a study by the IRS National Taxpayer Advocate, about 2,100 taxpayers paid installment agreements while their debts were assigned to private collection agencies (PCAs), made payments on which the PCAs were paid commissions, and have filed recent returns.
The data shows that:
■ More than 45% had incomes that were lower than their Allowable Living Expenses (ALEs). This means they could not afford to pay their basic living expenses under the installment agreements organized by the PCAs. Not only that, 4,905 taxpayers who made payments after their debts were assigned to a private collection agency, 4,141 had filed recent returns as of September 28, 2017. The returns filed by the 4,141 taxpayers show:
■ 19% had incomes below the federal poverty level; the median income for these taxpayers was $6,386;
■ 25% had incomes above the federal poverty level but below 250% of the federal poverty level; the median income for these taxpayers was $23,096.
Bottom line. You may want to hire a tax attorney or a tax relief company with attorneys on staff to look at your case if you think you may qualify for CNC status.
Disadvantages of IRS CNC status
CNC status can buy you the time you need to figure out how to pay the IRS and get your bills in order. And if you’re lucky and your case outlasts the statute of limitations, the bill disappears entirely. Sounds too good to be true? Well, CNC status also brings some serious downsides.
SuperMoney Tip: Don’t assume the IRS and you agree on what constitutes a hardship. What you may consider a hardship, the IRS may view as an inconvenience. A tax relief expert can help make your case. The IRS code defines significant hardship as “a serious privation caused or about to be caused to the taxpayer… Mere economic or personal inconvenience to the taxpayer does not constitute significant hardship.” Reg. § 301.7811-1(a)(4)(ii).
If you lose CNC status protection before the statute of limitations ends, your tax debt will not disappear. By the time you must pay your past-due tax, it has accumulated interest and countless late penalties — and you’ll have to budget for it and that year’s taxes. You’ll also lose any tax refunds that might come your way in the ensuing years. Under CNC status, the IRS exercises a “refund offset,” wherein any tax refunds are applied to your outstanding balance.
The Collection Financial Standards
Additionally, while under CNC status, the IRS will carefully monitor your spending. Its established expense limits are in the Collection Financial Standards. These standards limit your spending in all areas of your life: food, clothing, healthcare, housing, utilities, transport, and more.
If your financial situation changes, your status will also change— and the IRS will probably know before you do.
All of these factors can make for a tricky formula to work out. As such, you should consider the CNC status to be a temporary fix, not a long-term solution.
Is the IRS CNC status right for your financial situation?
Here is a list of the benefits and the drawbacks to consider.
- The IRS will not demand installment payment agreements for tax debts.
- The clock keeps running on the statute of limitations, and if it runs out, your bill disappears.
- Any rise in your income beyond the Collection Financial Standards will trigger the end of the CNC status.
- Prevents or removes levies that the IRS may place on your wages or bank accounts.
- Any tax refunds you may earn while under CNC status go toward your tax bill.
- Interest and penalties still accumulate on your tax bill.
- It delays the IRS collection process on your tax debts.
- IRS can place liens on your assets, which can harm your credit rating.
The bottom line on IRS Currently Not Collectible status
CNC status can buy people much-needed time to get their finances in order or to improve their financial situation so that they can afford their tax bill. It can even eliminate your tax bill if it remains beyond the statute of limitations. However, how long you can maintain hardship status relates directly to how much income you earn and how quickly your income improves. In most cases, CNC status will terminate before the end of the statute of limitations, leaving financially vulnerable taxpayers juggling two tax bills in a single year. Accordingly, it is not a catch-all solution for an unpayable tax bill.
Other options are still available if your financial situation does not qualify for currently not collectible status. The IRS Fresh Start Initiative offers several tax relief solutions, including payment plans and settlement agreements. If you’re unsure how to negotiate tax relief with the IRS, a competent tax professional can review your circumstances and make informed recommendations. They can even deal with the IRS on your behalf.
Lastly, if you owe a lot of money to the IRS, it can help to have a tax relief company on your side. The best tax relief companies have tax lawyers and enrolled agents on staff, provide a money-back guarantee, and charge competitive rates.
Don’t ignore your tax debt
Whatever you do, do not delay addressing tax liabilities. Unresolved tax debt can disrupt your income. The IRS can garnish your wages for payments to the IRS. The IRS can levy up to 15% from social security payments to address back taxes.