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How to Qualify for IRS “Currently Not Collectible” Status

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The IRS reports that nearly 30 million taxpayers file a return each year and owe taxes. The majority of taxpayers are capable of covering the tax debt immediately. On the other hand, nearly five million people can’t afford to settle what they owe.

What do you do if you are one of those five million? Approximately three million annual taxpayers establish a payment plan with the IRS, otherwise known as an installment agreement. However, some low-income earners struggle to even cover minimum monthly payments.

As a result, you may qualify for the IRS “currently not collectible” status.

Understanding “Currently Not Collectible” (CNC) Status

The worst mistake you can make with the IRS is to ignore filing a tax return, even if you are afraid of how you will pay taxes you owe. The IRS penalizes individuals who ignore and fail to report much more than those who file but lack the finances to pay back immediately.

Therefore, the IRS established the “currently not collectible” status, otherwise known as CNC, to assist low-income earners. CNC status is designed to assist taxpayers experiencing financial hardship by deferring payment until their financial situation improves.

A good example of someone who would qualify for CNC status is a person currently unemployed, who is struggling just to pay rent and put food on the table.

How to Qualify for IRS “Currently Not Collectible” Status

The IRS will work with taxpayers who want to remain in good standing with the agency yet lack the finances to resolve the tax debt immediately. Attaining CNC status does require some effort and time on your side, yet it is worth it if you are struggling to get by.

You will need to document your financial situation for the IRS. Taxpayers who qualify for CNC status must prove to the IRS that they can’t afford to pay off the debt.

The IRS reviews CNC status on a case-by-case basis. First, it will look into any potential “nest eggs” that could be used to pay taxes. For example, if you have a savings account with funds that could reasonably cover the tax debt, you likely will not qualify.

Taxpayers who lack assets to pay off the debt need to document their average monthly income and necessary living expenses to the IRS. In many cases, you may not be able to pay off the debt immediately, yet can do so in monthly payments through an installment agreement.

The IRS will analyze your average monthly income and necessary living expenses to determine qualification. The agency may also examine a financial statement (through IRS Form 433) and request additional verification of your income and expenses.

The biggest problem with currently not collectible status is the IRS is allowed to set limits on your expenses. For example, you may have a monthly car payment of $800 yet the IRS can legally limit it to $497. 

How to Request CNC Status

The first step is to contact the IRS or speak with a tax professional. It is a good idea to consult a tax professional as he or she has experience working with the IRS, particularly CNC status requests. Therefore, your odds of receiving approval for CNC status can improve through the generous assistance of a tax professional.

Dealing with the IRS can take time as you must contact them by phone or by writing a letter. After reaching a representative from the IRS, he or she will explain exactly what you need to provide to prove financial hardship for a CNC request.

Taxpayers also have the option of submitting financial information like Form 433 in advance, so by the time you contact the IRS they may already have a preliminary decision made on your CNC status.

The most important thing is not to ignore back taxes. Tax debt will not go away and the IRS does not forget it. It does no good to bury unpaid tax debt and hope the IRS will avoid pestering you. If anything, the penalties get more extreme and may include tax liens or levies.

By requesting CNC status, you can receive a temporary hold on your tax debt until your financial situation improves. However, you need to provide proof first that you need the tax extension.

Important Things to Consider about CNC Status

It is essential to remember that requesting CNC status is not the same as an Offer in Compromise (OIC) where you may reach a settlement with the IRS to owe less than the original tax obligation.

CNC status is merely temporary forgiveness on a tax debt. It is not permanent relief. Furthermore, the IRS can withhold any refunds in future tax years for unpaid tax debts. A federal tax lien may still get filed if you owe more than $10,000 regardless of CNC status.

The IRS reviews your CNC status each year, which means that once your financial situation changes, the status may get removed. The only exception is if the tax debt has been in CNC status for more than 10 years. Sometimes the IRS does “write off” your taxes, penalties, and interest, yet it isn’t something you should count or rely on happening.

Levy & Associates Supports Unique Financial Situations

It is unfair for the IRS to take money for a tax debt that otherwise would have gone to rent, utilities, or putting food on the table for you and your family. If you are concerned with how you will pay back taxes, consult a tax professional at Levy & Associates.

We offer an initial free consultation. You can meet with us to determine eligibility for CNC status, as well as receive steps on what to do next if you potentially qualify. Contact Levy & Associates today at 800-TAX-LEVY or visit www.levytaxhelp.com.

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