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If you can establish that you have insufficient income with which to pay a federal tax bill such that paying any tax due would cause a significant financial hardship, the IRS may forgo collection efforts for a period of time, in effect deferring your obligation to pay your taxes. While this may sound appealing, only certain taxpayers qualify for not collectible status and there are some notable caveats.
This article explores the qualifications for currently not collectible status (CNC), the process of securing the status, and the benefits and disadvantages of the status with suggestions for alternative tax resolution.
Qualifying for Currently Not Collectible Status
The IRS will review the taxpayer’s current financial circumstances to determine whether he or she qualifies for not collectible status. The taxpayer’s income and expenses as they exist at the time of the request for not collectible status, not as of last year or next year, will determine eligibility. For example, if you had a high paying job last year, you will not be precluded from obtaining not collectible status if you meet the qualifications at the time of the request (e.g. you are out of work this year and don’t have access to assets).
In determining ability to pay, the IRS will consider taxpayer’s gross monthly income offset by necessary living expenses. “Income” is interpreted broadly and will include wages, self-employment income, interest income, net rental income, IRA distributions, pensions and social security income, child support, alimony, and gift income.
As per the IRS guidelines, necessary living expenses include those that are required for living and carrying on daily life. For several categories of living expenses, the IRS has national standards that are based on the size of the household and the applicable county which represent a ceiling in terms of allowable expense.
The expense categories that the IRS recognizes for purposes of determining ability to pay include food, clothing, housing, utilities, vehicle ownership and operating costs, health insurance, out-of-pocket health care costs, court ordered payments, child dependent care, life insurance, taxes, and secured debts. There are specific expense categories that are excluded from this analysis, including education costs and payments toward credit card debt.
In order to qualify for not collectible status, a taxpayer must show that there is very little, if any, monthly household disposable income leftover after taking income and expenses into account. Accordingly, taxpayers who typically qualify for not collectible status:
- Have expenses that exceed income;
- Have no income; or
- Only receive unemployment or social security income.
If the IRS determines that the taxpayer can afford to make monthly payments via an installment agreement, even if to do so would not fully pay the tax liability within the collection statute expiration date (also known as a partial pay installment agreement), it will not approve a request for currently not collectible status.
In addition, even where the taxpayer qualifies for not collectible status based on their monthly household disposable income, if they have assets in the form of retirement accounts or real property, the taxpayer must demonstrate the he or she cannot borrow against that asset to pay their taxes before the IRS will place them in not collectible status.
The Process of Requesting Not Collectible Status
The process of submitting a request for not collectible status involves completing a financial statement using IRS Form 433A, (for individuals) or 433-B (for businesses) submitting it along with supporting documents in the form of proof of income and expenses which may include paystubs, billing statements, and bank statements.
If a Revenue Officer is assigned to your case, you must submit the request directly to him or her. Otherwise, the request can be made over the phone with the IRS Collections Department, however you will likely have to provide proof of income and expenses via fax.
If the request is preliminarily approved, it will typically take 2-4 weeks for the not collectible status to become effective and the taxpayer will receive a letter from the IRS confirming same. In some cases, the Revenue Officer or Collections Agent may require additional information and documentation to evaluate the request which will extend the timeline.
Benefits and Disadvantages of Currently Not Collectible Status
There are several advantages of securing not collectible status with the IRS. Once approved for CNC:
- The IRS will not attempt to garnish your wages;
- The IRS will not issue bank levies;
- The IRS will not levy pension or social security benefits;
- The IRS will not usually require that the taxpayer become filing compliant before setting up the status, however this is recommended;
- The ten-year statute of limitations continues to run such that the IRS will have less time to collect the tax due once the taxpayer is deemed collectible.
Notwithstanding the benefits, there are some notable disadvantages that may give taxpayers pause before seeking not collectible status. These include the following:
- The tax debt doesn’t get eliminated or reduced. Rather the IRS merely suspends collection activity temporarily;
- Interest and penalties will continue to accrue while on not collectible status;
- The IRS will file a tax lien against taxpayer’s property to protect its interest. A tax lien puts the public on notice of the federal government’s legal claim to your property and will remain on your property until the debt is paid in full or the collection statute expires. If you sell the property, proceeds from the sale will go to satisfy the tax lien;
- CNC is a temporary status. The IRS will revisit taxpayer’s financial circumstances every year or two and the taxpayer will have to reapply to remain on not collectible status;
- The IRS will continue to hold your refunds and apply them toward the outstanding tax debt while you are on not collectible status; and
- The IRS will continue to send annual balance due notices.
The eligibility requirements and competing benefits and disadvantages of the IRS’ currently not collectible status must be considered in the context of each taxpayer’s unique situation. Some taxpayers may qualify for CNC based on their monthly household disposable income but not based on the equity in their real estate or retirement accounts. Other taxpayers may qualify for CNC but not be comfortable with the IRS filing a tax lien against their property, especially when the tax debt and corresponding tax lien will not expire for several years.
Do You Need a Tax Attorney?
A tax attorney can help you determine whether you qualify for currently not collectible status and review the benefits and disadvantages as they relate to your unique case. When your monthly household disposable income is low but not low enough to qualify for CNC, your legal tax professional can also suggest alternate methods of resolution which may include a settlement with the IRS via offer in compromise or the establishment of a partial pay installment agreement.
The experienced tax attorneys at Segal, Cohen & Landis have helped clients who cannot afford to pay their outstanding tax liabilities by providing the following services:
- Establishing currently not collectible status;
- In the alternative, establishing partial pay installment arrangement;
- In the alternative, filing an offer in compromise; and
- IRS Appeals such as Collection Due Process Appeal.
If you are interested in having a complimentary consultation with one of our partner attorneys regarding your tax matter, please feel free to contact us at 866-505-1872. We would be happy to advise you as to how we can resolve your case and how much it would cost.