In an ideal world, everyone would be able to afford to pay their taxes. However, that’s obviously not always the case. The IRS has recognized the fact that sometimes, requiring a taxpayer to pay anything towards a delinquent liability would create a financial hardship. For these situations, the IRS has created a special coding that can be placed on an account that will essentially put a halt to all collection action, despite not requiring the taxpayer to enter into any type of formal agreement with the IRS, nor make any payments on an ongoing, monthly basis. This is what the IRS refers to as Currently Not Collectable, or “CNC.”
How to qualify for Currently Not Collectible:
In order to qualify for a hardship-based Currently Not Collectible designation, you must provide the IRS with a completed Collection Information Statement. As a general rule, the IRS will grant a hardship Currently Not Collectible designation when a taxpayer has no assets or income which are, by law, subject to levy, or where a taxpayer has limited assets or income, and it is determined that levy action would create a hardship, i.e. the levy action would prevent the taxpayer from meeting necessary living expenses.It is important to bear in mind that in the context of CNC, the IRS will allow only expenses which are necessary living expenses and fall within IRS allowable expense standards. The first step in obtaining a CNC designation by the IRS is demonstrating that one’s allowable expenses exceed monthly income. Once that’s been established, attention must turn to equity in assets. Even if a taxpayer is running at a deficit each month, the IRS will generally request that the taxpayer liquidate any equity in assets and pay the proceeds to the IRS before granting CNC. However, certain items of equity can be excluded from the IRS’s consideration if the liquidation of those assets would present a financial hardship for the taxpayer. For example, perhaps a taxpayer has equity in their home. The IRS may request that the taxpayer sell or refinance their home in order to make a lump sum payment to the IRS before a CNC designation is granted. However, if it can be shown that a refinancing would increase the monthly cost of the taxpayer’s housing to to the point where the taxpayer would be unable to meet the increased mortgage cost on their present income, or if it can be shown that there are no affordable alternative housing arrangements available to the taxpayer that would meet their needs, the IRS may be convinced to disregard the equity in the home before granting CNC. Furthermore, say a taxpayer is retired and now on a fixed income. They would qualify for CNC but for their retirement account. The IRS may request the taxpayer liquidate their retirement account and pay the proceeds to the IRS, but if it can be shown that the taxpayer is running at a deficit each month, and will be reliant upon the funds in the retirement account to meet their necessary living expenses in the future, the IRS may be convinced to ignore some or all of the equity in the account under the theory that requiring a liquidation of the account would create a financial hardship in the future.
How does Currently Not Collectible Work?
Currently Not Collectible functions more or less the same as having an installment agreement in place with the IRS, save for the fact that the required monthly payment under a CNC designation is zero. One of the main benefits to a CNC determination is that the time period that the IRS has to collect on a tax liability continues to run while a taxpayer is in Currently Not Collectible. While a Currently Not Collectible designation does not make the tax liability go away, hardship CNC determinations are usually granted for at least 2 years, after which the IRS will typically reach back out to the taxpayer to request an updated Collection Information Statement to determine whether the taxpayer’s financial situation has improved to the point where they can begin making payments against the tax liability. Therefore, Currently Not Collectible can be an especially effective resolution where the IRS has limited time available to collect on a liability. If the tax liabilities remain in CNC until the IRS’s 10 year Collection Statute Expiration Date has lapsed, the taxes will be written off.
If I can qualify for Currently Not Collectible, why wouldn’t I submit an Offer in Compromise?
Filing an Offer in Compromise affords a taxpayer something that a Currently Not Collectible designation does not, namely, it is a final resolution to your outstanding tax liabilities. Why then, would a taxpayer who might be qualified for Currently Not Collectible prefer to submit a CNC request rather than a request for an OIC? First, it’s possible to qualify for a Currently Not Collectible and not be eligible or otherwise be able to agree to an Offer in Compromise with the IRS. While the IRS might concede in not making a taxpayer liquidate items of equity before granting a Currently Not Collectible designation, this is far less likely in the context of an Offer in Compromise. Furthermore, an Offer in Compromise can take well over a year from submission to approval, and during the time the Offer is under consideration, the Collection Statute Expiration Date (CSED) is tolled, meaning the liabilities are not getting any closer to expiration. Oftentimes, if there is a limited amount of time to collect on a liability, it makes more sense to pursue a Currently Not Collectible designation and allow the liabilities to expire. As Offers in Compromise generally require you to make an initial lump sum payment with Offer submission, obtaining a CNC designation for older liabilities that are set to expire can offer the same finality as an Offer in Compromise and at less of a cost to the taxpayer. Finally, a hardship Currently Not Collectible designation is the only collection alternative that does not require a taxpayer to be in compliance with their tax filing and current-year tax payment obligations, so if achieving the requisite tax filing or payment compliance is not possible at the present time, CNC may be a more feasible option than submitting an Offer in Compromise, at least in the short term.
Final Thoughts:
There are a number of ways to approach resolving a tax liability. Not everyone will qualify for a hardship Currently Not Collectible designation, and even for those that do, Currently Not Collectible may not be the best option to pursue. One of the most important steps in resolving a federal income tax liability successfully is to do a holistic review of your circumstances, combining a deep understanding of both the present state of each of your liabilities with an understanding of how the IRS will review your present financial situation. At O’Connor and Lyon, we can provide you with the peace of mind that comes with understanding exactly where you stand and what your best options are for resolving your tax liabilities before getting the IRS involved.