Temporary Inability to Pay IRS Debt
In many cases, financial relief has at least something to do with merit. Bankruptcy is a good example, as debtors who racked up hundreds of thousands of dollars in medical bills are more likely to qualify than debtors who charged luxury items on credit cards and refused to pay the bills. But in other cases, the line is easier to draw. After all, as my mother used to say, “you can’t squeeze blood from a turnip” and some taxpayers simply lack the means to pay their bills. Therefore, to qualify as currently not collectible, taxpayers must convince the IRS that they are anemic turnips, and such items are very, very rare.
CNC is a good option for people who have a temporary financial hardship, such as a failed business or excessive medical bills, and need a little time to get back on their feet. CNC is an even better option if the ten-year collections statute of limitations will shortly expire and you just want to run out the clock.
What Does CNC Status Mean?
Even if your account does qualify as currently not collectible, this designation does not eliminate tax debt. Only full payment, an agreed settlement, and in some cases bankruptcy, can do that. In fact, while the IRS does halt most collection activity during a CNC period, penalties and interest continue to accrue at the regular levels. The IRS does routinely file tax liens on CNC accounts. Property liens must be satisfied before said property can be transferred. Furthermore, federal tax liens show up on credit reports.
CNC is not permanent. The IRS reassesses this status every time the taxpayer’s positive income increases. “Positive income” is not adjusted gross income on Line 37. Instead, agents usually look at the total income (before deductions and credits) on Line 22. If PI increases at all, the taxpayer must normally re-qualify as currently not collectible.
One final note on this point: The IRS offsets (keeps) any tax refunds due to CNC taxpayers.
How Do I Qualify as Currently Not Collectible?
Internal Revenue Manual 5.16 sets out the general qualifications for hardship CNC. The procedure is essentially the same for offers in compromise.
Income/expense is obviously the most important calculation. Income is usually fairly easy to calculate. Bear in mind that if the taxpayer can get a loan or sell an asset, which is different from “wants to” get a loan or sell an asset, the Service will take these factors into consideration. To evaluate allowable expenses, the IRS uses its collection financial standards, which has four categories:
- Utilities and housing,
- Clothing, food, and other household expenses,
- Uninsured health care expenses, and
If the taxpayer’s actual expenses are significantly higher than the IRS average calculations, the Service will disallow the disputed amount unless the taxpayer establishes that the overage is necessary for “health, welfare and/or production of income.” If there is anything (and I do almost literally mean anything) left over, the taxpayer will probably not qualify as currently not collectible.
To begin the hardship determination process, the IRS normally wants a completed Form 433, the last three months of bank statements, and ancillary documents pertaining to medical bills or any other large expenses.