We all try to stay on the good side of the IRS, but sometimes you simply can’t pay what you don’t have.
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 find out 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.
What is IRS currently not collectible (CNC) status?
Also referred to as a hardship status, CNC status is a temporary protection from taxation. It applies to taxpayers who cannot afford to pay their taxes without seriously harming their standard of living.
While you’re under the protection of CNC status, the IRS will delay your tax collection, and won’t require an installment agreement. It also removes any levies on your wages or bank accounts.
Under the statute of limitations, the IRS has ten years from the date you first owed back taxes to collect the taxes, interest, and penalties. So if your CNC status lasts beyond the ten-year mark, the tax bill disappears.
Do you qualify for IRS CNC status?
If you truly cannot afford 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, as well as filing any missing tax returns from previous years. The IRS does not grant this status lightly.
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 then 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 to request Form 433-A, a Collection Information Statement. Along with the 433-F, the 433-A provides a more detailed picture of your finances.
Don’t expect the IRS to tell you that you qualify
There is no Internal Revenue Code definition of “low income.” However, 250% of 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; 38 and
■ 25% had incomes above the federal poverty level but below 250% of the federal poverty level; 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. Sound 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 hardship as “Significant hardship means 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’s 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, and 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 you?
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 have a negative effect on your credit rating.
Bottom line on IRS Currently Not Collectible status
CNC status can buy you much-needed time to get your finances in order, or to improve your financial situation such that you can afford your tax bill. It can even eliminate your tax bill entirely 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.
If you don’t qualify for CNC status, there are still other options available. The IRS Fresh Start Initiative offers a number of 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.
See if you qualify for an IRS hardship program.