I Just Lost My Job, so I Cannot Pay My Tax Debt. Can I Apply for Currently Not Collectible Status?
Although the IRS has a scary reputation, it actually offers taxpayers several solutions for resolving their tax debt. The IRS tries to work with the taxpayer when possible and understands that at times certain circumstances make it difficult to pay a tax debt, such as losing your job. When this happens, one tax relief option is to change your status to Currently Not Collectible. It is not always the best solution, but it has its benefits.
What is Currently Not Collectible?
Currently Not Collectible, also known as Hardship Status, is a special status the IRS applies to your account when you face significant financial hardship and cannot afford to pay your tax debt. This is a temporary measure that lasts for a period of time the IRS sets based on the situation. The determining factor for changing your status back may be a particular time period or until your income increases. During this time, no collection action may be taken and you do not have to pay any money towards the IRS. However, it does not actually resolve your tax debt.
The Downside of Currently Not Collectible
Currently Not Collectible (CNC) is simply a status rather than a resolution of your tax debt. Once your financial situation changes, such as finding a new job, the IRS will change your status back to active and expect you to pay or face collective action. At this time, you will be expected to pay your tax debt in full, although you may request an Installment Agreement.
During the time your account is designated CNC, your tax debt will grow exponentially. The IRS continues to charge interest and apply penalty charges for the entirety of the time your account is CNC. This can make it even more difficult to pay the taxes after your financial status improves. Additionally, any future refunds will automatically be applied towards the tax debt and the IRS may be able to implement a lien against your assets. There are other tax relief options that may provide better solutions for handling your tax debt even while you are unemployed, such as starting or revising an Installment Agreement.
How to Qualify for Currently Not Collectible
If you decide that CNC is the best solution for your situation, then there are some important things you will have to prove. To qualify for this status, you must demonstrate that you have limited funds and no assets that could be sold to pay the debt. Your normal living expenses must equal or even exceed your income. It is important to recognize that it must be truly a hardship on you to pay your taxes. If it would only be an inconvenience rather than a hardship, then your application will not be approved. There are some other reasons that the IRS will accept your application for CNC beyond financial hardship, such as disability or extended debilitating illness, but ultimately financial hardship is the strongest reason for applying.
In some scenarios, the IRS automatically changes the status of an account to CNC. This typically occurs when the statute of limitations expires on a tax debt, the taxpayer or assets are unable to be found or there is no way to enforce the collection, a corporation has suspended business activities and there are no remaining assets, a corporation was liquidated in bankruptcy, or a person has died and there is no collection potential for any of the estate assets.
Just because you lost your job does not mean that you can qualify for CNC, nor does it mean this is the best course of action for you. You may qualify for an Offer in Compromise, or it may be best to sell an asset and pay your debt or set up Installment Agreements. The tax professionals at Fidelity Tax Relief will review your situation and determine the best course of action for you to give you true relief from your tax debt, not just a temporary break. Contact us today to get started.