Although we all wish taxes were an expense we could remove from our annual obligations, unemployment or other extreme circumstances may leave you with no possibility of paying taxes at all. If you find that your living expenses leave you with little-to-no money left over to pay your tax bill, seeking Internal Revenue Service (IRS) Non-Collectible Status may be an option — especially if you are temporarily experiencing a financial hardship.
While the IRS will take several steps to get you to pay, such as sending collections notices and encouraging you to set up a payment plan, it usually will not force you to choose homelessness if you truly have no way of paying and take the initiative to work with it. Here’s what you need to know about Non-Collectible Status and what it means in the long run.
What Is IRS Non-Collectible Status?
IRS Non-Collectible Status is also known as “Currently Not Collectible (CNC) Status. “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.
Here are a few facts to keep in mind:
- It is generally applied to people who have already begun to receive collections notices after failing to properly pay their taxes.
- It results in a temporary pause in communication from collections agencies and the obligation to continue making payments on their tax bills.
- Although there is no set amount of time that an individual is allowed to remain in non-collectible status, you should be aware that you will be expected to resume making payments as soon as you are financially able to do so.
- In some circumstances, your financial information may be reviewed within two years of obtaining non-collectible status to determine your eligibility to continue deferring.
At this time, you will generally need to begin making some type of payments if your income has increased or your financial situation has otherwise improved since you applied for CNC status.
Who Qualifies for IRS Non-Collectible Status
Not everyone who is currently experiencing financial difficulties is automatically eligible for CNC status. You will first need to explain to the IRS why you are applying for it and prove that your current income is insufficient to cover your basic living expenses as well as pay your tax bill. 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.
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.
Reasons to Seek Non-Collectible Status
Because non-collectible status is typically only granted for people who have no other options, you will first need to have a valid reason for not being able to make payments.
- Unemployment is one of the most common reason for applying for non-collectible status.
- Other acceptable reasons include a significant drop in income, medical bills or extreme unexpected expenses that fall into the guidelines of the non-collectible status program.
- Those who only receive income from Social Security or welfare benefits that is not enough to cover tax payments after basic essential living expenses may also qualify.
- Non-collectible status is generally considered to be a last resort for people who have no other options for paying their tax bills.
- The IRS prefers that those who are struggling to pay taxes first consider setting up a payment plan, an option that approximately 3 million Americans are currently using.
- CNC status is reserved for those who currently have little-to-no income beyond funds.
If you are confident that you do not have the income to support any type of payment plan, you will need to provide the IRS with information about your savings and other assets, as well as your current financial situation. You will usually need to have an annual income of less than $84,000 to be considered for non-collectible status.
Other Things to Know Before Applying for Non-Collectible Status
It is important to note that any tax refunds you may otherwise be eligible for during the period in which you are in non-collectible status will automatically be taken by the IRS until you finish paying off your tax bill. Tax bills that are excessively high may also have other ramifications, such as a tax lien being filed if you owe more than $10,000.
How Do I Apply for IRS Non-Collectible Status?
Once you have determined that non-collectible status is your only option, you will need to submit your current financial information to the IRS to apply for this status. This process involves several steps, outlined below.
Step 1: Gather Your Financial Information
Begin by collecting your bank statements, proof of income and monthly living expenses, and information about your current assets. You will also need to provide proof of unemployment, significant medical expenses, or other significant financial hardships. This step provides the IRS with a picture of your current financial situation to help the agency make an accurate decision.
Step 2: Fill Out Your Financial Statement
Once you have gathered your financial information, you will need to fill out Form 433-A or Form 433-F. These forms require the information from Step 1, and filling out either is acceptable.
Step 3: Analyze Your Financial Statement
Next, you will need to determine how much (if any) you have left over each month after paying for food, rent, and other essential expenses. Subtract these amounts from your total monthly income to prove to the IRS that you do not have enough left to participate in a payment plan.
Step 4: Submit Your Financial Statement
Finally, submit form 433-A or Form 433-F to the IRS. Although you can mail this form in, you can usually get a quicker decision by calling the IRS directly at 1-800-829-1040 or having a tax professional call this number for you to discuss the information included in this statement.
Available Resources Related to IRS Non-Collectible Status
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.
Pros and Cons of Applying for CNC Status
There are substantial advantages and disadvantages to having CNC as your status:
Advantages of CNC 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.
Disadvantages of CNC Status
- 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.
Get Help Applying for Currently Non-Collectible Status
At Silver Tax Group, we understand that unemployment and other extreme circumstances may affect your ability to pay taxes during a typical year.
We are here to discuss your options if you are having trouble paying your taxes, and we can assist with applying for IRS Non-Collectible Status if your current financial situation requires it.
Contact us today to learn more about whether seeking non-collectible status is the best option for you.
