‘Currently Not Collectible’ (CNC) status refers to a temporary pause in the active collection of a taxpayer’s back tax liability. It is a status that the IRS assigns to a taxpayer’s account when it determines that the taxpayer cannot pay any of their tax debt without causing financial hardship. This article covers the intricacies of CNC status, its implications, and the process of obtaining it.
Understanding the Concept of Currently Not Collectible Status
Currently Not Collectible status is not a permanent solution to tax debt, but rather a temporary reprieve. While in CNC status, the IRS will not attempt to collect the tax debt through typical collection activities such as levies or liens. However, the tax debt does not disappear and interest and penalties continue to accrue.
CNC status is not granted automatically. A taxpayer must apply for it and provide substantial proof of financial hardship. The IRS will then review the application and make a determination based on the taxpayer’s current financial situation and future earning potential.
Criteria for Currently Not Collectible Status
When determining whether or not a taxpayer qualifies for CNC status, the IRS will consider factors such as income, expenses, ability to pay, and asset equity.
Income includes any money received, including wages, self-employment income, rental income, and retirement income. Expenses are the taxpayer’s necessary living expenses, such as housing, utilities, food, transportation, and healthcare. The IRS uses national and local standards to determine allowable living expenses. Ability to pay is the amount of money the taxpayer has left after paying their necessary living expenses. Asset equity is the value of the taxpayer’s assets, such as real estate, vehicles, and bank accounts, minus any debts owed on those assets.
Implications of Currently Not Collectible Status
CNC status can provide temporary relief from the stress of IRS collection activities, but also has some significant implications. The most important of these is that the tax debt does not go away. Interest and penalties continue to accrue on the unpaid tax debt, potentially increasing the amount owed.
Additionally, the IRS may periodically review the taxpayer’s financial situation to determine if their ability to pay has improved. If the IRS determines that the taxpayer can now afford to pay their tax debt, it may revoke the CNC status and resume collection activities. The IRS can also file a tax lien against the taxpayer’s property, even while the account is in CNC status. This can affect the taxpayer’s credit score and ability to obtain credit.
Process of Obtaining Currently Not Collectible Status
The process of obtaining CNC status involves several steps. The taxpayer must first complete a Collection Information Statement (Form 433-A for individuals or Form 433-B for businesses) and provide proof of their income and expenses. The IRS will review this information and may request additional documentation.
If the IRS approves the application, it will temporarily stop collection activities. However, the IRS will continue to assess interest and penalties on the unpaid tax debt.
Preparing the Collection Information Statement
The Collection Information Statement is a detailed document that requires the taxpayer to provide information about their financial situation. This includes income, expenses, assets, and liabilities. The taxpayer must also provide documentation to support the information on the statement, such as pay stubs, bank statements, bills, etc.
It’s crucial to provide accurate and complete information on the Collection Information Statement. Any discrepancies or omissions could result in the IRS denying the application for CNC status. If the taxpayer is unsure about any aspect of the statement, they should seek assistance from a tax debt attorney.
Dealing with IRS Review and Potential Denial
After the taxpayer submits their Collection Information Statement and supporting documentation, the IRS will review the information. This review process usually takes a couple of months. During this time, the taxpayer should continue to comply with all tax laws and requirements.
If the IRS denies the application for CNC status, the taxpayer has the right to appeal the decision. The appeal process involves submitting a written request for a Collection Due Process hearing. At the hearing, the taxpayer can present their case and provide additional evidence of their financial hardship. If the appeal is unsuccessful, the taxpayer may have other options, such as an installment agreement or an offer in compromise.
Alternatives to Currently Not Collectible Status
If a taxpayer does not qualify for CNC status or if their CNC status is revoked, there are other options available for dealing with tax debt. These include installment agreements, offers in compromise, and bankruptcy. Each of these options has its own requirements and implications, and the best choice will depend on the taxpayer’s specific circumstances.
An installment agreement allows the taxpayer to pay their tax debt in monthly installments over a period of up to six years. An offer in compromise allows the taxpayer to settle their tax debt for less than the full amount owed. Bankruptcy may eliminate some or all of the taxpayer’s tax debt, but it has serious consequences and should be considered as a last resort.
Understanding Installment Agreements
An installment agreement is a payment plan that allows the taxpayer to pay their tax debt in monthly installments. The IRS offers several types of installment agreements, including guaranteed, streamlined, and non-streamlined agreements. The type of agreement that a taxpayer qualifies for depends on the amount of their tax debt and their ability to pay.
To apply for an installment agreement, the taxpayer must submit a Installment Agreement Request (Form 9465) and a Collection Information Statement (Form 433-F). The IRS will review the application and determine the monthly payment amount based on the taxpayer’s income and expenses.
Exploring Offers in Compromise
An offer in compromise is an agreement between the taxpayer and the IRS to settle the tax debt for less than the full amount owed. The IRS will consider an offer in compromise if it believes that it is unlikely to collect the full amount of the tax debt within the statutory collection period.
To apply for an offer in compromise, the taxpayer must submit an Offer in Compromise (Form 656) and a Collection Information Statement (Form 433-A for individuals or Form 433-B for businesses). The taxpayer must also pay a nonrefundable application fee and a initial payment towards their tax debt.
Conclusion
Currently Not Collectible status is a temporary solution for taxpayers who are unable to pay their tax debt due to financial hardship. While it can provide relief from IRS collection activities, it also has significant implications, including the accrual of interest and penalties on the unpaid tax debt.
Obtaining CNC status involves a detailed application process and periodic reviews by the IRS. If a taxpayer does not qualify for CNC status or if their CNC status is revoked, there are other options available for dealing with tax debt, including installment agreements and offers in compromise.
Dealing with tax debt can be stressful and complicated. It’s important for taxpayers to understand their options and to seek assistance from a tax professional if needed. With the right information and support, taxpayers can navigate the IRS Collections process and find a solution that works for their specific circumstances.
