When people’s tax situation gets precarious due to lack of adequate income and substantial living expenses, a common course of action with the IRS is to start a payment plan or to let the Internal Revenue Service know what you can afford to pay.
Similarly, when businesses enter a period of financial hardship due to forces outside their control, they must interact with the IRS in order to make clear how dire the situation is, in order to receive relief from constant reminders of an outstanding bill.
However, there are people and businesses who are in a case where paying anything on their tax bill will cause them extremely hardship, putting them in substantial danger of not paying for essential expenses. In this case, the Currently Not Collectible status may be a good option.
What Is “Currently Not Collectible”?
“Currently Not Collectible,” or CNC, is a status you can request from the IRS. It is your opportunity to demonstrate your sources of income and your sources of reasonable, essential expenses and show that you simply cannot pay on your bill at this time.
If granted, CNC gives you breathing room to get back on track; when you request it, you’ll be given a certain level of income at which they’ll contact you to re-evaluate if you’re ready for a payment plan.
CNC is also a benefit to the IRS, albeit a small one; they are better off if they know that no amount of collections letters or calls will help you pay your debt, and it helps them recognize that wage garnishment threatens your ability to continue to feed, clothe, and shelter yourself and your family.
The IRS wants to use their influence to get payments from those who have the ability to pay their taxes, but doesn’t want to waste resources attempting to collect from you continuously if you really need some time to move out of a hardship situation.
Who Is Eligible for CNC?
Being eligible for CNC is a little complicated. Here are some key things to consider:
- You’ll need evidence of your income, much like you’d use to file taxes anyway.
- You’ll need evidence of any savings or other money/assets, since these influence whether the IRS sees you as having the ability to pay.
- You’ll also need evidence of your key bills: rent, car payments, utilities, groceries, etc. The IRS has a standard amount for certain bills at the national level and at the local level for a given city/state that equates to a ‘reasonable’ expense. So if you are paying an unreasonable amount in rent by their calculations, they only count the ‘reasonable’ portion in their calculation of your eligibility.
A few particular circumstances increase your likelihood of qualifying for CNC status:
- If your only income comes from government benefits like social security or welfare.
- If you are currently unemployed.
If you are struggling to pay your taxes and have had a recent lay off or temporary unemployment, contact Silver Tax Group for a consultation.
How Long Does CNC Last?
It really depends on your circumstances. In many cases, you’ll be reviewed the following year to determine whether changes in income or expenses make you able to pay on an installment basis or in full.
For instance, if your current income level of $24,000 a year is not enough to make payments on your tax bill, the IRS may opt to check back in with you when your income level hits $28,000 or $30,000, depending on what might be a reasonable time for you to begin making payments on your tax debt.
Qualifying Factors for CNC
The factors that put you in the running for CNC status involve primarily your current income-to-basic-needs ratio. This means that, for instance, if you’ve become unemployed in an area with high housing costs, the IRS can recognize that paying your tax bill, even in installments, may endanger your ability to sustain your livelihood.
The goal of this status is to take the pressure off temporarily in order for people to get back on their feet, rather than having an additional bill create extreme duress. For this reason, the Currently Not Collectible status is reserved for ‘hardship’ conditions.
CNC is a less useful option if you have savings but have lost your current cashflow. For one thing, you may not qualify, but on the other hand, CNC doesn’t stop the accrual of interest or penalties for late payments, so your bill grows over time.
To qualify for CNC, you need to demonstrate that your basic ability to feed, clothe, and shelter yourself and your family is at risk. Otherwise, the IRS will work with you in a different way to create a payment plan for your tax debt.
Applying for CNC status involves a variety of information and verification in order to show the IRS your expenses and income to make the case for why paying will endanger your daily needs.
- Begin by filing your taxes as usual. Don’t assume that you can only file your taxes if you can currently pay your bill; instead, gather your income information and deductions as usual.
- Check if you qualify for CNC status by calling the IRS. Having a tax bill due usually triggers a notice that will have specific instructions for you, so save that information, but if you don’t have the notice any more and are ready to get started on this process, call 800-829-1040 for individual taxpayers, or 800-829-4933 if you are a business.
- At this point, you’ll probably be asked to document your assets and debts, including any monthly bills as well as standard living expenses. Your income should already be documented in your tax returns. IRS Form 433 (A, B, or F) may be requested by the IRS as part of their determination, but check which version applies for you.
- The IRS will evaluate your financial documents based on both the national expense deductions, which include out-of-pocket healthcare, food, and clothing, and locally-specified deductions for housing, utilities, and transportation. If your income is not higher or is even lower than your allowable expenses, they may opt to put your account in Currently Not Collectible status.
- The outcome of the evaluation may still be that you are liable for payments on your debt, if they do not grant your request for CNC status. At this point, you can work with a trusted tax attorney to determine what your remaining options may be for an appeal of this decision.
The IRS may have complicated rules, but there are a variety of resources to help you understand your situation and make the best of it.
- First, the IRS publishes The Rights of the Taxpayer, which outlines the ways in which you can advocate for yourself and work with your accountant to get through difficult or frustrating tax-related situations.
- Second, the IRS transparently shares this document about The Tax Collection Process. Collections calls and letters are stress-inducing, but they shouldn’t be ignored, since that will only make them multiply. Instead, learn about the circumstances that got you here and see the ways to move forward.
- Third, the IRS does have an appeals process if you believe something has been handled incorrectly. The process can be time-consuming and confusing, so you’re better off with a tax professional on your side to help you know how solid your case may be.
- Silver Tax Group understands the way that everything from IRS audits to how to use an Offer in Compromise to handle a tax bill. Our experienced attorney group knows that, as a business owner or individual, you want to figure out the best path forward for you that gives you the breathing room you need. Use us as a resource if you worry that CNC status might be the best option for you.
Pros and Cons of Applying for CNC
There are substantial benefits to having CNC as your status:
- Breathing room for your current, tight economic circumstances.
- No further credit reporting or wage garnishment, if these things were happening because of your debt previously.
- No constant or stressful contact from the IRS (though they will contact you with updates or to review your situation periodically).
- A chance to look into new employment or weather a financial downturn before working to pay back what you owe.
However, remember that CNC status isn’t the same as having no debt to the IRS:
- They can still levy penalties and interest on the total amount you owe.
- If your income increases or admissible expenses decrease, the IRS can use methods like a wage garnishment or keeping your refunds.
- CNC is temporary protection, and the IRS typically can continue to re-evaluate for a given tax debt and attempt to collect in the following 10 years.
Still not sure whether your best option is to apply for Currently Not Collectible status? Have you been recently laid off or placed on temporary unemployment? Don’t let the IRS add to your worries at this stressful time. Work with Silver Tax Group today to discover the best option for your tax situation.