Benjamin Franklin once said that nothing is certain in this life but death and taxes. I’ll agree that none of us will cheat death. But I may quibble with Mr. Franklin on the issue of whether or not you have to pay all of your taxes. Under the right set of circumstances, full payment of taxes (and sometimes any payment of taxes) is far from certain.
If you or your business fails to resolve back-taxes totaling more than about $10,000, it’s likely that the IRS will take relatively serious measures to collect it. They will send letters demanding payment. They’ll file Federal Tax Liens. If the tax liability remains unresolved, they’ll even issue levies to your bank account, or garnish your wages, or send letters to your customers telling them to pay the IRS instead of you. They can even seize your non-exempt assets, though typically this is done as a last resort.
Somewhere in this process (the earlier the better) you need to decide on a way to resolve this. In general, you have three options. First, you can full pay, if you have the means. Second, you can ask the IRS for an Installment Agreement, which they may or may not grant depending on your circumstances. Third, you can file an Offer in Compromise with the IRS, and request to settle your balance for less than the amount you owe. Ordinarily, this third option is only available to you if you have insufficient equity in assets or income to full pay (although there are exceptions, discussed here). The biggest downside of the Offer is that it’s incredibly time-consuming, and the IRS will pore over every detail of your financials before giving an inch. The biggest upside to an Offer is that you may be able to settle for a small fraction of what you owe, and, once accepted, the settlement is a binding contract.
However, there is also a fourth, lesser known resolution that the IRS might rather you not know about. Its technical term among IRS employees is “Status 53”, but it’s more commonly known as “Currently Not Collectible” (CNC) status. This means pretty much exactly what it says: The IRS knows you owe the liability and you know you owe the liability, but you successfully prove that you can’t pay it. To use an applicable sports analogy, this is when the IRS punts.
So who’s most likely to benefit from CNC? Obviously, those who’ve met Ben Franklin’s second definition of certainty will qualify: deceased taxpayers (whose estate cannot pay). Beyond that, the Internal Revenue Manual will sometimes allow the IRS to place taxpayers into CNC if they’re living out of the country, they’re unreachable, or the statute of limitations has passed.
It’s also common for the IRS to take pity on senior citizens who subsist solely on Social Security benefits, or disabled taxpayers, and place them into CNC. Next on the list are middle-class families, with a 9-5 breadwinner, or an individual living paycheck to paycheck and renting a house or apartment. Despite common myth, the IRS tends to show some degree of empathy towards such people. Even an individual with years of delinquent tax returns is eligible for CNC if she can demonstrate that she’s broke.
What’s less common — but still possible – is for businesses, including LLCs, corporations, limited partnerships, or sole proprietorships, to meet the definition of Currently Not Collectible as the IRS sees it. The IRS seethes at the prospect of giving one business a competitive advantage over another by not requiring it to repay back-taxes. This reluctance is understandable, if you go at it from an issue of fairness. But if you’re the one behind the wheel of your own business, you want to play every card in your hand that keeps your business open. And regardless of how much the IRS hates you to play it, this card is playable.
So how do you play this card? For starters, you will want an expert to represent you. There are a lot of landmines along the way, not least among them a Revenue Officer who may go so far as to say that CNC is “impossible” for businesses. This is patently untrue, and you don’t want an IRS employee trying to pull the wool over your eyes. A trained attorney who deals with IRS Collections on a daily basis won’t let that happen. CNC is definitely possible for some businesses, and you can achieve this result in a fraction of the time it takes to get an Offer approved. What’s more, if your business remains uncollectible long enough, the liability will lapse due to the statute of limitations.
That’s not to say that any business has a smooth road to CNC. If you have equity in large equipment, real estate, or even large amounts of accounts receivable, securing CNC status may be a challenge. In my career, the most common collections cases that ended in CNC involved businesses in the hospitality industry, such as restaurants or convenience stores, and some medical offices. These businesses have few, if any, high-dollar assets, tend to lease their location from a landlord, and have little in the way of accounts receivable.
The financial review process is arduous. A Revenue Officer will scour your physical business location, collect the bank statements, review the financial statements, double-check the asset list, and study the tax returns to see if a dime can be squeezed. And once you’re granted that CNC status, the IRS will check in on you from time to time (usually every 18-24 months until the 10-year statute of limitations expires) to see if your business is able to begin making payments.
Finally, your business will need to be in compliance with the tax laws. Federal Tax Deposits need to be sufficient and timely; all tax returns need to be up to date. It’s one thing to have sinned in the past, and racked up a large liability with the IRS. It’s another to be an ongoing “borrower” from the IRS by continuing to fail to pay taxes. You’re playing with fire if you’re among the latter.
Perhaps the most important thing you can do, however, is never lose hope. I have been practicing before the IRS since 2005, and I’ve turned plenty of lost causes into success stories. Once, I was retained by a client in 2007 to help them handle a tax liability they had accrued for the previous 4 or 5 years. My client and I fought off the dragons at the gate for what seemed like eons. For 13 years – eight with me by their side – they flouted the tax laws, facing injunctions and even threats of criminal charges.
Then the clouds parted: My client got their act together for 6 months in the year 2015, paid their current taxes, filed their current returns, and behaved like a reformed good citizen. A Revenue Officer promptly placed their business into CNC. They’re still in business today, but with a half-a-million-dollar discount on their tax bill, which effectively became a gift from the IRS. Yes, it can happen to you.