How to Qualify for Currently Not Collectible IRS Status

Back taxes can be nightmare-ish to handle, especially in those instances where your financial situation renders your paying a complete impossibility. The IRS understands this and offers temporary relief in the form of Currently Not Collectible status. This can give you some breathing room by putting collection activities into a state of suspended animation until you are in a position to improve your finances. This article will cover how someone qualifies for Currently Not Collectible status, what it is, and how it compares to other options for tax relief such as the Offer in Compromise.

1. What Is Currently Not Collectible Status?

Currently Not Collectible status is a designation assigned to the account by the IRS and serves to temporarily cease all collection activity against an account when it cannot pay a tax debt currently due. The IRS accepts the account is experiencing economic hardship and will not intend to levy on the account while the account is in CNC status. Meanwhile, the interest and the penalty portion of your tax liability continues to accrue, and the IRS will also periodically check on your financial status if it has improved.

CNC status is a temporary reprieve issued by the IRS and is not permanent relief per se since this only relieves the taxpayer from the immediate stress brought about by the IRS collection efforts so that the same may focus on financial recovery.

1. Eligibility Requirements of Currently Not Collectible Status

To be qualified for Currently Not Collectible status, you must prove that paying your tax debt creates severe financial hardship on your part. You cannot meet all your basic living expenses such as housing and utilities, food, and medical care and pay the payment of one’s tax debt simultaneously.

Here are some general eligibility requirements:

• You cannot pay reasonable living expenses: You shall have to make it evident that your income is not sufficient to pay for the living expenses considered necessary after accounting for the various taxes the IRS considers.
• Lack of assets: The IRS may expect you to sell any valuable asset or to borrow on the asset to pay your debt.
• Full financial disclosure: You need to file comprehensive data regarding your income, assets, and expenses to substantiate that you cannot pay your tax debt.

1. The Role of Offer in Compromise in CNC Considerations

While Currently Not Collectible status provides temporary relief from payments, another IRS program by which an agreement to settle with the IRS for less than one’s total amount of tax debt is called an Offer in Compromise. In some instances, it may be also viable that a taxpayer eligible for CNC status will apply for an Offer in Compromise.

An Offer in Compromise is generally considered when the IRS feels that they will not be able to collect the full tax debt based on your financial situation. If your financial hardship is severe enough to consider being granted CNC status, you may also want to explore whether an Offer in Compromise is a viable alternative for permanently settling your tax debt.

In fact, many tax professionals will try both CNC and Offer in Compromise to determine which will provide the best long-term results.

1. Steps to Qualify for Currently Not Collectible Status

Following are the steps towards applying for Currently Not Collectible status:

• First step: Collect financial documents. Gather all those documents that represent your financial picture. It includes pay stubs, bank statements, expense receipts for things such as rent, utilities, and food, and also whatever asset you possess in the form of details.

• Step 2: IRS Forms You are required to prepare and submit Form 433-F Collection Information Statement or Form 433-A for individuals. These forms have very specific questions relating to your income, assets, and expenses.

• Step 3: Send in Your Financial Information Submit the forms with all attachments to the IRS for review. You can communicate directly with the IRS or use the services of a professional tax consultant to represent your case in front of them.

• Step 4: IRS Review Let the IRS conduct a financial check on you; after that, they could grant you a CNC status. This might take weeks, so be prepared to sit back and wait for their decision.

• Step 5: Pay Future Taxes You also need to pay your taxes every year to remain current, even with CNC status. If you do not file a tax return, you may lose your CNC status.

1. Proving Financial Hardship to the IRS

Showing financial hardship is the most important part of Currently Not Collectible status qualification. The IRS needs good documentation that your current income is too small to pay for basic living expenses.

Here is some essential evidence you will want to collect:

• Income verification: Recent pay stubs or profit/loss statements if you are self-employed.

• Monthly expenses: Utility bills, rent/mortgage statements, medical bills, and any other necessary living expenses.

• Bank statements: Statements showing the current balance in your account and the most recent transactions on the account.

• Asset documentation: Any and all ownership documents relative to cars, property, or any other large assets.

The IRS will use this information to figure out if your income is below what the IRS allows a family your size in your area to live on according to their allowable living expenses chart, in which case you can’t afford to pay any tax debt.

1. The Benefits and Limitations of CNC Status

CNC Status Benefits:

• Temporary Reprieve: The most important advantage it provides is that it halts any collection activity, such as wage garnishment or seizure of property.

• No Monthly Payments: Unlike an installment plan, CNC status will not call for any payments while you are feeling the financial burden.

• Time to Recover: This status provides you with time to recover in case there are problems with your financial situation to a level where you will have to reconsider tax payments again.

Disadvantages of CNC Status:

• Accruing Interest and Penalties: Your tax debt shall keep on growing through the interest and penalties that keep on accruing.

• Periodic Review: The IRS periodically will review your financial situation and if your financial situation has improved they may remove you from CNC status and resume their collection activity.

• Temporary Solution: CNC status provides relief but does not constitute a permanent solution to your tax debt

1. Alternatives to CNC Status

If your case does not befit the best option for CNC status, there are other IRS tax relief options you may want to check:

• Offer in Compromise: An OIC, as above explained, allows a settlement of the tax debt for an amount less than the whole tax liability owed. If qualified, this may be a permanent resolution for one’s tax debt.

• Installment Agreement: The IRS accepts a month-to-month payment of your tax debt. Comparatively more feasible than paying at once, it does not diminish the debt amount.

• Partial Payment Installment Agreement: Much similar to an Installment Agreement except that monthly payments are smaller and, by the end of the term of agreement, the total paid may or may not be sufficient to pay your tax debt.

• Currently Not Collectible with Penalty Relief: Other times the IRS may even grant you CNC status and can even wipe out any penalties as an added way to lighten the load.

Conclusion

Currently Not Collectible status may entitle you to crucial short-term relief from IRS collections and give you the additional time you may need to get back on your financial feet. Know the qualifications, advantages, and limitations of CNC status: An experienced tax professional is in the right position to represent and establish the required evidence of financial hardship. He/she can easily depict all other alternatives which may be more viable in any particular case, which may include an Offer in Compromise or Installment Agreement when filing for CNC status is not feasible. If done correctly, one can move easily with his or her tax debt and keep the further stress away from his or her financial life.

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