Under the right circumstances, the Internal Revenue Service can designate a taxpayer’s account as “currently not collectible” (or CNC), meaning that collection activities on past due delinquent taxes will cease. The immediate effect is that all efforts to collect on a tax bill are halted, including letters, phone calls, garnishments and levies. This can provide relief to taxpayers who are struggling to stay up-to-date with current tax obligations but are also coping with a large past-due tax bill. The IRS grants CNC status by discretion, meaning that it will be considered on a case-by-case basis. How can you qualify?
Some of the most common reasons that the IRS will grant currently not collectible status include, but are not limited to, the following:
- The IRS cannot locate the taxpayer or assets.
- The IRS knows the taxpayer’s address but cannot initiate contact and there is no means to enforce collection.
- There is a partial or complete expiration of the statutory period for collection. Generally, the IRS has 10 years to collect on assessed delinquent taxes and will compute the Collection Statute Expiration Date (CSED) to determine the deadline for enforcement. While some taxpayer actions can actually toll and extend the CSED into the future (e.g. filing for bankruptcy, leaving the county, requesting an offer in compromise, etc.), the granting of CNC does not change the CSED and a taxpayer can potentially be uncollectible all the way up to the deadline.
- The taxpayer’s account was “below tolerance”, meaning that the aggregate unpaid amount is now below a certain threshold.
- There was a lawsuit initiated in the U.S. Tax Court or U.S. District Court to reduce a tax claim to judgment.
- The taxpayer is able to pay but he or she resides in a foreign country.
- The taxpayer was a corporation, exempt organization or limited liability company (LLC) and it was liquidated in bankruptcy OR remains in business and pays current tax obligations but is unable to pay past due taxes OR is inactive and defunct with no assets.
- The individual taxpayer died and there is no collection potential from the decedent’s estate.
- The individual taxpayer is currently deployed in a combat zone on active duty.
- The collection of the liability would create a hardship for taxpayers by leaving them unable to meet necessary living expenses. In these cases, the taxpayer either has no income or assets, or has no equity in the assets possessed (e.g. mortgage balance on home or lien amount on vehicle exceeds fair market value), or the taxpayer has insufficient income to make any payment without causing hardship (e.g. taxpayer would have to choose between paying tax bill or paying rent to stay in home).
If you are granted CNC status, keep in mind that this is only a DEFERRAL of your tax bill, NOT forgiveness. CNC status may be temporary and the IRS will remove it if the taxpayer’s financial situation improves. For example, a taxpayer who lost his or her job may be granted CNC status due to a hardship. However, if the IRS receives a W-2 or Form 1099 in a subsequent year showing that the taxpayer is now employed and has sufficient income to pay the tax bill, then CNC status will be withdrawn.
To receive CNC status, the taxpayer must ask the Internal Revenue Service for it. It will not be granted automatically. You must call or write to the IRS to make the request, either yourself or through a representative (e.g. attorney, CPA, enrolled agent). Of course, the IRS is going to want proof that you are unable to pay your taxes. They may require you to fill out a financial statement on Form 433-F (Collection Information Statement). In addition, they may ask you to document your average monthly income and living expense by completing Form 433-A (Collection Information Statement for Wage Earners and Self-Employed Individuals). Any businesses such as corporations or LLCs looking for CNC status must complete a financial statement on Form 433-B (Collection Information Statement for Businesses). The taxpayer must disclose all current assets and all present sources of income. This information will have to be supported by bank statements, paystubs, receipts, invoices for outstanding medical bills and any other evidence of financial obligations such as child support or court-ordered restitution. The IRS will also conduct a sweep to look for any financial accounts you may have with sufficient funds to pay taxes provided that money is not required for necessary living expenses.
According to the Internal Revenue Manual, verification for a financial statement is not required if the aggregate unpaid balance of taxes is currently less than $10,000.00 and AT LEAST ONE of the following conditions exist (IRM Section 22.214.171.124.9(6)):
- The taxpayer has a terminal illness or excessive medical bills.
- The taxpayer is incarcerated.
- The taxpayer’s only source of income is Social Security, welfare, or unemployment.
- The taxpayer is unemployed with no source of income.
If the aggregate unpaid balance of taxes is currently over $10,000.00, the IRS will do the following additional verification (IRM Section 126.96.36.199.9(7)-(9)):
- Utilize on-line asset locator services such as Accurint to locate real and personal property, motor vehicles and financial accounts.
- Review most recent income tax return filed in the last two years and pursue any leads.
- Review motor vehicle records from the DMV located in the taxpayer’s state.
- Check courthouse records online or in-person for evidence of real or personal property ownership.
- Order a full credit report from a consumer credit bureau if the unpaid balance of taxes exceeds $100,000.00.
- Conduct FinCEN research to see if the taxpayer has filed a Foreign Bank Account Reporting (FBAR) form to locate assets that may be off-shore if the unpaid balance of taxes exceeds $100,000.00.
For hardship claims, the Internal Revenue Service will calculate your “total positive income” (e.g. wages, dividends, rents, etc.) and compare it against national and local standard living expenses to determine if there should be any discretionary income left to pay taxes:
- For 2020, the Allowable Living Expense National Standards for food, housekeeping supplies, apparel, personal care products and other miscellaneous items are $715.00 per month for one person, $1,298.00 per month for two persons, $1,433.00 per month for three persons, $1,740.00 per month for four persons and $378.00 for each additional person beyond four.
- For 2020, the Allowable Out-Of Pocket Health Care Standards for medical services, prescription drugs and medical supplies such as eyeglasses or contact lenses is the TOTAL of the amount the taxpayer pays in health insurance PLUS $56.00 per month if under age 65 OR $125.00 per month if age 65 or older.
- The IRS uses Local Standards for housing and income broken down by the state and county. For example, in 2020, the Local Standards for Housing and Utilities in Monroe County, Michigan are $1,357.00 per month for one person, $1,593.00 per month for a family of two, $1,679.00 per month for a family of three, $1,872.00 per month for a family of four, and $1,902.00 per month for a family of five. The taxpayer would be entitled to use the local standard or the actual expense, WHICHEVER IS LOWER.
- The IRS uses Local Standards for transportation and calculates it in two ways. In 2020, if the taxpayer owns a vehicle, the average ownership costs (e.g. monthly payments on loan or lease) are $521.00 per month per vehicle (up to two vehicles), and operating costs (e.g. gas, maintenance, etc.) are broken down by metropolitan region. In the Detroit metropolitan area, the local standard for operating costs of a vehicle to a taxpayer are $314.00 per month per vehicle (up to two vehicles). If the taxpayer does not own a vehicle, the taxpayer may use the single nationwide allowance for public transportation based on fares for trains, buses, taxis, etc. A taxpayer with no vehicle in 2020 can use the national standard for public transportation of $224.00 per month without question regardless of actual expenses.
These national and local standards are adjusted annually to account for increased costs and inflation. The IRS will rigidly apply these standards to your monthly income to determine what disposable income you have available to pay your tax bill. If your total income is less that the total allowances permitted under the national and local standards, you will likely qualify for CNC status. If your total income is more than the total allowances permitted, then the burden is on you to show additional documentation that you are in dire economic straits due to a large medical bill, natural disaster or some other emergency.
If CNC is granted, the IRS will file Form 53 (Report of Currently Not Collectible Taxes) in the taxpayer’s account to freeze collection efforts. The taxpayer (or his or her representative) will be issued Case Closing Letter 4223 (Case Closed – Currently Not Collectible) indicating that the request was granted. However, recall that CNC status is merely a temporary tax deferral, not forgiveness, subject to the following:
- The taxpayer must continue to stay current on filing income tax returns. Failure to comply can result in losing CNC status. The IRS is permitted to retain any tax refunds due on currently filed income tax returns to apply to the past due debt.
- The IRS will continue to monitor tax returns each year to see if income has increased. If the IRS determines that the taxpayer’s income has increased beyond necessary living expenses to be able to pay on the tax bill, then it will trigger a review where CNC status can be removed and the IRS may require new financial statements to consider reinstatement.
- Interest and penalties will continue to accrue on the unpaid tax balance even if CNC is granted. There may be a larger tax bill due overall.
- If CNC is removed and the CSED is imminent, the IRS may become very aggressive in collecting on the tax bill before the statute of limitations expires since the taxpayer’s account is “on the radar” and they may be armed with additional information tendered through the financial statements.
The IRS receives thousands of requests each year for CNC status but only a handful are approved. Even if the taxpayer is ineligible, he or she may qualify for other methods to resolve the tax debt such as installment payments or an offer-in-compromise. A tax professional can advise you what may be the best method to pursue in your situation.
If you have any questions about federal tax law or need legal assistance, then do not hesitate to contact the experienced attorneys at Kershaw, Vititoe & Jedinak PLC today.