I’ll say it. The IRS Currently Not Collectible status is THE BEST.
Anyone with a big tax problem, with neither the resources nor time currently available to resolve said tax problem, should look into being classified as Currently Not Collectible.
The complexity and depth of tax laws and financial obligations can sometimes lead even the most diligent and proactive individuals and businesses into some really dark places.
A great fear many people share is that fear of the IRS coming and taking your car or cleaning out your bank accounts.
Yeah. That can happen. But you really have to screw up for them to go that far. As long as you communicate with them, they will work with you on your tax problem.
Financial hardships happen. If paying your taxes becomes an insurmountable burden, the Internal Revenue Service (IRS) offers a lifeline in the form of the Currently Not Collectible (CNC) status.
A Currently Not Collectible status won’t relieve you of your liability. What it does is give you a temporary reprieve from IRS collection activity, and time to reboot your financial life. CNC status lasts from 6 to 12 months. It is possible (probable in my experience) that if approved, you will be on CNC status multiple years
How To Qualify for CNC Status
On the surface this seems easy. You can’t pay. You don’t have the money. Your hours were cut back, or you were laid off and can’t find another good job.
The cornerstone of obtaining CNC status is by demonstrating your financial hardship. This entails showcasing an inability to pay basic living expenses due to dire financial circumstances.
You prove your hardship by showing bank statements, bills, past due notices…any third party documentation that can paint a clear picture of your hardship. Providing a complete and accurate picture of your financial situation is crucial, necessitating comprehensive documentation of income, expenses, assets, and liabilities.
How Do You Apply?
The application process is deep. You will need to share everything as it relates to your financial health. The key to being approved is to paint a picture of your situation using paystubs and bank statements to show income/money in, and bills, invoices and past due notices to show expenses/money out.
Prepare Form 433-F or 433-A, depending on your individual or business status. These forms serve as comprehensive snapshots of your personal and business situation.
The IRS takes this information, and reviews and analyzes the data to formulate an opinion as to your financial health.
If you are patient, diligent and thorough, you can put together a packet that gets you approved for CNC status. However, if you don’t feel confident in dealing with an IRS Revenue Officer, contact a professional. Be aware that not all CPA’s and Enrolled Agents do tax resolution. Tax resolution is a specialty within the tax preparation realm.
Now We Wait……..
Now the hard part (for you). The IRS will analyze your documentation and poke and prod your finances until they understand where you are.
It’s very likely that the IRS will come back to ask for clarification, or additional information. Make sure you get this to the Revenue Officer working with you ASAP. Your Revenue Officer is working on upwards of 70 cases at a time, but if you get your info to them in an expedient way, they will bump you up their list of priorities.
After carefully scrutinizing your information, the IRS will issue a determination—approval grants the CNC status, temporarily suspending collection actions, while denial comes with an explanation of the reasons and alternative courses of action.
The Good, Bad and Ugly of CNC Status
What’s good about CNC status?
The benefits of obtaining CNC status are obvious. The IRS halts all collection activity against you. You get a reprieve of sorts, allowing you to do what needs to be done to better your financial health.
A huge benefit (to me) is the fact that the IRS 10-year collection period DOES NOT TOLL. This means it doesn’t stop. This is a big deal since it reduces the time available for the IRS to pursue the tax debt.
What’s bad about CNC status?
On the surface, this does nothing with regards to reducing or paying your tax debt. Interest and penalties also continue to accrue, adding to the debt.
What’s ugly about CNC status?
The ugly is the IRS doesn’t hand this status out like Tic Tacs (not TikTok for you Gen Zers :^)) . It’s a complex process that involves a lot of back and forth with your Revenue Officer.
It also lasts just 6-12 months. The IRS will require periodic updates to make sure nothing’s changed in regards to your finances. This can also be a good thing. If your financial situation remains static, say due to medical issues or a lawsuit, you may be able to retain CNC status for multiple years.
How can you lose CNC Status?
At the risk of sounding like a jerk, you’ll lose your CNC status if you start making enough money to pay something back each month.
Improving your financial situation will move you closer to losing CNC status.
If your situation hasn’t improved, then to maintain CNC status you must file all tax returns on time and pay your current taxes. We don’t want to add to your already large balance.
What can you do besides CNC Status?
Bankruptcy?
Removing federal taxes through bankruptcy is possible, but you have several hoops to jump through initially AND, the IRS can deny the write off. I had a client qualify via bankruptcy to write off all but $350k of a $1.8mil tax debt. IRS council denied the write off. We ended up going a different route that cost the client $220k. I wonder if that attorney lost their job?
Offer in Compromise?
If you’re in this position, and OIC is something to seriously consider. You will probably be inundated with ads proclaiming they can get you off for “pennies on the dollar”. An OIC might be the right direction, but it will cost you a lot more in professional fees.
Installment Agreement (or Partial Pay Installment Agreement)?
This is the most used option. If you are having money problems now, I don’t see this as an option. After taking a few years to clean up your finances, and depending on the sze of the tax debt, I can see using CNC to remove a few years from the 10-year collection window, then applying for a partial pay installment agreement. This is the long way, but for a lot of people, the best way out.
Conclusion: Using The Magic Wand That is Currently Not Collectible Status
CNC Status can be used in many different ways.
Time.
The IRS has 10 years to collect the tax you owe. Use CNC Status to get the IRS to stop collection activity, thereby giving you time (and energy) to fix your money situation.
Easy to morph to another option.
You’ve already collected the info needed to prepare an Offer in Compromise, or a Partial Pay Installment Agreement. If you foresee your financial situation remaining status quo for the foreseeable future, you may consider an Offer in Compromise at this time.
The same can be said about a Partial Pay Installment Agreement. This option would be available if our situation improved a little and you could send “something” to the IRS. You must also apply for a Partial Pay Installment Agreement.
Interest and Penalties.
Interest and penalties will continue to accrue, adding to our balance. These are statutory charges, with minimal opportunity to remove. Collection activity stops. The debt doesn’t.
As a tax professional I’ve used CNC status A LOT. When a client walks in looking like Eeyore, you know things are bad. Tax problems are a big deal in the US. There are over 14,000,000 open tax cases at the IRS. Knowing the available options and how to use them is essential to getting you out of trouble.
But knowing how to use different options together is when you really save a lot of money.
So that’s it for today. Thanks for your time and talk soon!
Stay cool.
JKC
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