Do you stare at your tax bill and have no idea how you will be able to pay any of it and afford your daily living expenses, even with an Installment Plan or personal loan? Well, the IRS has a program in place to help you out: Currently Not Collectible (CNC) status.
When the IRS gives you this status, the agency puts your account on hold, which means that they do not expect to get any payment from you, and you will not have to face collective action like a wage garnishment or levy. You can pay down your debt, but the IRS does not force payment. Before you jump on board, there are a few key factors you need to know.
Criteria for Qualification
Currently Not Collectible can also be thought of as forbearance or a break in your responsibility for paying. Although your tax bill remains and accrues interest and penalty fees, you do not have to worry about losing your house or car.
There are several reasons why the RS might designate your account with this status, including the inability to locate, the expiration of the statute of limitations, the death of an individual, and deployment. Additionally, you can apply for the status if paying your taxes would create a hardship for you. Not everyone qualifies for Currently Not Collectible status. Generally, you must demonstrate that:
- You have no outstanding tax returns, and you continue to file every year even if you cannot pay
- Your income barely covers your basic living expenses using financial documents as proof
- Seizing property would lead to an unfair hardship
Let’s talk a moment about your living expenses. The IRS might not agree with you about some expenses being necessary living expenses. They will look at your expenses for things like rent or mortgage, food, clothing, car payments, and basic living supplies. In many of these categories, there is a maximum amount.
So, if you make $500,000 a year and use your entire income paying expensive housing costs and car payments, the IRS might not be as helpful as they will be to someone who makes $50,000 a year paying average amounts for their housing and automobile costs. In the former case, the IRS might expect you to sell your property and use the equity to pay your tax bill, since you should have some left over to pay for reasonable living expenses.
The Down Side
Although this status designation sounds great, for some people, it is not the right solution, especially if you consider the downsides that include:
- Future refunds might be held to pay off your debt
- Your debt continues to accrue interest and penalty payments
- You have to pay your debt once your CNC status expires, which will be higher once you include the additional interest and penalty fees
- You might still have a lien on your account, which might impact your credit report
It is important to note as well that the IRS has a code on your tax return account that looks for a change in your income. You are expected to continue to file tax returns, even if you are CNC. When your income improves past a certain point, then your status changes and the IRS will bill you and expect payment within a certain amount of time, which is usually 30 days. The IRS will also review your account every few years and might choose to review it at any time to determine if you should remain in CNC status.
Statute of Limitations
The IRS has a statute of limitations during which they can collect your outstanding taxes. Although some tax relief programs and other circumstances alter the number of years, in general, the statue of limitations is 10 years. When your account is in Currently Not Collectible, the statute of limitations continues. If you remain CNC until the 10 years is up, then you will not have to worry about paying your tax, as long as the statute of limitations did not change due to other circumstances.
When To Consider CNC
For many people, some of the other tax relief options work better than CNC status, since you still collect penalty and interest on your original tax liability, which increases the amount you ultimately have to owe. However, if you meet the qualifications, there are a few scenarios where it might be a good move for you.
One of the biggest considerations for applying for CNC is how many years you have left on your debt. If you only have a few years left in your statute of limitations, then it might benefit you to sign up for it, since you will hopefully get through your 10 years before your status changes and never have to pay. Additionally, if you are unemployed with no other source of income or your only income comes from welfare, unemployment or Social Security, then you might find that CNC’s benefits outweigh the downsides.
Other Options
If you feel that applying for Currently Not Collectible is not the right solution for your tax debt, you have other options, including:
- Taking out a loan or using credit cards
- Selling property to pay for the loan
- Setting up an Installment Agreement
- Negotiating an Offer in Compromise
- Apply for Penalty Abatement or one of the other tax relief options
Contact Fidelity Tax Relief today to discuss your situation with one of our tax professionals. They will review your file and determine the right solution for you. We will also take you through the application process and appeal process, working as your advocate along the way. You can get out from under the IRS!
