A topic that doesn’t get a whole lot of attention from tax professionals is “Currently Not Collectible” (“CNC”) status, which is a status that your account with the IRS may obtain when you cannot currently afford to pay the debt. It makes sense that tax professionals wouldn’t pay a lot of attention to this issue because inability to pay a tax debt probably equates to an inability to pay a tax professional for assistance. But obtaining this status can be of great benefit to taxpayers who are in that situation. It’s something that we frequently attempt to take advantage of with clients that come to the Tax Clinic that I run.
In order to obtain CNC status, a taxpayer must request it, and unfortunately, despite the fact that the IRS has a form for seemingly everything, there is no form to fill out to obtain CNC status. The only way to accomplish this is to call the IRS main number, which may require a lengthy hold.
Prior to approving your request to delay collection, the IRS may ask you to complete a Collection Information Statement (Form 433-F, Form 433-A, or Form 433-B and provide proof of your financial status (this may include information about your assets and your monthly income and expenses)).
You should keep in mind that, if the IRS does agree to a delay in collecting from you, your debt will increase because penalties and interest are charged until you pay the full amount. Also during the delay, the IRS may again review your ability to pay, and they may also file a Notice of Federal Tax Lien to protect the government’s interest in your assets. Contrarily, if CNC status is implemented, §6343(e) of the Internal Revenue Code also authorizes the IRS to release a levy with respect to an account that has been determined to be CNC.
The decision to place a taxpayer’s account into CNC status is made by reference to Internal Revenue Manual (“IRM”) 5.16.1 (https://www.irs.gov/irm/part5/irm_05-016-001r). The IRS uses procedures outlined in Treas. Reg. § 301.6343-1(b)(4)(ii) for determining economic hardship. That regulation provides a non-exclusive laundry list of factors that the IRS will use in determining CNC status, including:
- The taxpayer’s age, employment status and history, ability to earn, number of dependents, and status as a dependent of someone else;
- The amount reasonably necessary for food, clothing, housing (including utilities, home-owner insurance, home-owner dues, and the like), medical expenses (including health insurance), transportation, current tax payments (including federal, state, and local), alimony, child support, or other court-ordered payments, and expenses necessary to the taxpayer’s production of income (such as dues for a trade union or professional organization, or child care payments which allow the taxpayer to be gainfully employed);
- The cost of living in the geographic area in which the taxpayer resides;
- The amount of property exempt from levy which is available to pay the taxpayer’s expenses;
- Any extraordinary circumstances such as special education expenses, a medical catastrophe, or natural disaster; and
- Any other factor that the taxpayer claims bears on economic hardship and brings to the attention of the director.
Keep in mind that CNC Status is not permanent, and it does not mean that the debt goes away. It only results in a temporary delay in collection activity. Also remember, as noted above, that CNC Status does not prevent either interest or penalties from accruing, nor does it prevent the IRS from filing a “Notice of Federal Tax Lien”. In fact, IRM 18.104.22.168(3) generally requires that a Notice of Federal Tax Lien be filed on accounts being reported CNC when the aggregate unpaid balance of assessments equals or exceeds $10,000.00.
Although not ideal, sometimes taxpayers need a breather from often aggressive collection efforts, and CNC status can provide at least a temporary reprieve.
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