How to Resolve Your IRS Tax Debt Without a Payment Plan

If you have a tax problem, if you have no hope of help, and if you qualify, maybe you can qualify for CNC with the IRS.

What is “CNC” you ask? Well, the Internal Revenue Service (IRS) has a collection status called “Currently Not Collectible.” Basically, this is the IRS’ label for sticking your case on the shelf for a time. During this time, the IRS will not actively pursue collections. Let’s dive right in and figure out if CNC is right for you!

What is Currently Not Collectible status?

Currently Not Collectible means, to the IRS, that a taxpayer will not have enough money to pay for their basic living expenses if they are required to make monthly payments to the IRS through an installment agreement. Think of the saying, “you can’t squeeze blood out of a turnip”. To determine if a taxpayer is a turnip, the IRS will evaluate the taxpayer’s finances to determine whether the taxpayer would face a true hardship through tax payments instead of simply being placed at an inconvenience.

The IRS can deem a tax debt as uncollectible when the taxpayer submits enough financial documentation to show that he or she will not have anything left over to make payments to the IRS after paying their monthly allowed living expenses from all income sources. If the IRS places the taxpayer in currently not collectible status, enforcement actions, including levies, asset seizures, bank levies, and garnishments, will not be taken as long for the time the taxpayer remains in CNC.

NOTE: It is VERY important to remember that even when a taxpayer is in CNC, the IRS can still file a Notice of Federal Tax Lien. In fact, in my experience, being place in CNC INCREASES the likeliness on a Lien being filed.

However, the taxpayer must submit substantial documentation to support the designation of a currently not collectible status. If the taxpayer is an operating business, the documentation required will be even more extensive. Taxpayers will likely have to submit documentation of current payments and loans, bank and other account statements, proof of recurring monthly bills, information about all assets and income sources, and expenses from vendors and service providers. If the information documenting a taxpayer’s assets and liabilities is not sufficiently detailed, the request for currently not collectible status will likely be denied. These types of documents are meant to prove that the requesting taxpayers will endure financial hardships if required to make monthly payments to the IRS for the owed debts.

Revenue officers vs. Automated Collections

Who & what are Revenue Officers (ROs)? Ros typically have more experience than other IRS tax collections professionals within the IRS and are specifically trained to collect delinquent tax debts. An RO has several duties, including interviewing taxpayers in person, collecting, and analyzing financial data to determine whether a taxpayer could pay, creating tax repayment plans to allow taxpayers to repay arrearages over time, and seizing property and garnishing wages to enforce tax debts. Revenue officers can also commence administrative proceedings and refer taxpayers to other IRS departments for judicial (criminal) action.

If a taxpayer is assigned an RO, the officer will pour over the financial information the taxpayer submits. He or she will then make recommendations or issue demands about cutting back on expenses to make payments to the IRS. Under the rules, taxpayers are expected to prioritize the repayment of tax debts over other types of expenses. Substantially fewer businesses are accepted into CNC status as compared to individual taxpayers.

Who & what is Automated Collections? Individual taxpayers are likelier to be assigned to the Automated Collections System (ACS). ACS is generally easier to deal with because the operators are not personally invested in individual cases.

Collection Financial Standards used by the IRS

The IRS has collection financial standards in place that limit how much taxpayers can pay each month for certain expenses. These limits are divided into several categories, including the following:

Food
Clothing and services
Housekeeping supplies
Personal care supplies and services
Miscellaneous expenses
Out-of-pocket health care expenses

These categories fall under the national standards for food, clothing, and other expenses and the national standards for health care costs. The national standards place limits on each of the above-listed expense categories that apply no matter where a taxpayer lives in the U.S.

Local standards apply to other types of expenses, including housing and utilities and transportation costs. The allowed expenses in these categories vary, depending on where the taxpayers live.

When taxpayers try to negotiate with the IRS, the agency will refer to these standards when trying to resolve tax liabilities strictly when the taxpayers are requesting placement into a currently not collectible status.

How taxpayers qualify for CNC status

The procedures followed by the IRS for currently not collectible status are listed in HERE. Since all collection activities will immediately stop when CNC status is granted, taxpayers must provide proof that they do not have the ability to repay their debts. The IRS will ask individual taxpayers to submit Form 433-F, which is the collection information statement or CIS. This form requires the taxpayer to provide detailed information about their assets, income sources, and regular expenses. The IRS considers requests for CNC status on an individual basis.

How long does CNC status last?

CNC status is temporary. When a taxpayer’s debt is deemed to be currently uncollectible, the taxpayer will be allowed more time to improve his or her financial situation so that he or she can repay the debt. During the time, a taxpayer is in CNC status, the tax debt will not be eliminated. Instead, the IRS’s enforcement efforts will be suspended.

***NOTE: When a taxpayer is placed in CNC status, Interest and penalties can still accrue. ***

The initial CNC status will last for one year. When a taxpayer files a new tax return after being placed in CNC, the IRS will examine the return to determine whether the taxpayer has recovered enough (this mean $$$ income level) to start repaying the tax liability. The IRS can ask for additional information from the taxpayer to determine whether the taxpayer’s financial situation has improved enough to begin making payments. If the IRS determines that the debt remains uncollectible, the CNC status will be continued over to the next tax period.

If the taxpayer’s debt cannot be collected within 10 years of the initial due date, the IRS cannot sue to collect the debt. There is a 10-year statute of limitations for the collection of income tax debts. However, there are some exceptions to this rule. For example, if a taxpayer failed to file a tax return, the statute of limitations clock does not begin to run until the return is filed.

When a taxpayer is in CNC, the limitation period will continue to run. If the IRS cannot collect the debt before the statute of limitations ends, the tax debt will expire.

Four critical aspects of requesting CNC

There are four crucial aspects of requesting CNC that taxpayers should know.

If taxpayers withhold relevant information or provide false information, they could be criminally prosecuted. Taxpayers should never fudge numbers to try to be placed in CNC status. A taxpayer who can barely afford a monthly payment might instead try to negotiate a partial installment payment agreement or make an offer in compromise to settle the tax debt.
The limitation period will continue to run during the CNC status. When the limitation period ends, the tax debt will expire. This means that someone who remains in CNC status for the entire limitation period will not have to repay the debt.
The state in which a taxpayer lives might review his or her financial situation more frequently than the IRS when the taxpayer is in CNC status. For example, while the IRS might review the taxpayer’s finances every year, the state might review it every six months.
Taxpayers who are approved for CNC status cannot simply forget about the IRS. If they accrue new tax liabilities while in CNC, they may be kicked out of the status. They can also be terminated if they fail to respond to a request for information from the IRS.

Jeff Roltgen, Tax Rescue CPA
Jeff@TaxRescueCPA.com
www.TaxRescueCPA.com