You may have heard of people owing the IRS a huge sum of money who claim to have never repaid a penny of it and wondered if this can possibly be true? Are they crazy? We are, after all, talking about the IRS—the country’s most formidable creditor.
If you owe the IRS, and you’re trying to work with the Collection Division on your own, nobody is likely to let you in on a fairly big secret. IRS Collections will always push you to at least make some payment toward your liability (standard procedure is to ask you to pay in full; if you cannot do that, they will very likely push for monthly installments). That is what they’re trained to do. But what if you don’t have enough money to pay your necessary living or business operating expenses, while also making a monthly payment to the IRS on an Installment Agreement? For that situation, I have good news…
The IRS has the ability to formally consider a debt uncollectible—at least for the time being. They will make the determination that a debt is Currently Not Collectible (CNC) when a taxpayer with a liability submits sufficient financial documentation to prove that, given their income and necessary monthly expenses, there is nothing left over to make a payment to the IRS. The IRS will not take enforcement action (e.g. bank levies, wage garnishments, accounts receivable levies, seizure of assets) against a taxpayer while that taxpayer’s tax liability is in Currently Not Collectible status (known internally at the IRS as “Status 53”).
Be careful, though, the level of detail required for a Currently Not Collectible determination is extensive; even more so for an operating business. You will likely be required to provide bank statements, proof of current loans and monthly payments, verification of recurring monthly expenses, and bills from service providers and vendors. Those documents are intended to prove that you will experience a financial hardship if the IRS requires a monthly payment from you.
For businesses, you will almost certainly have to provide the financial information to a Revenue Officer (a tax collector in your local area). If your business tax case is with Automated Collections (ACS), you can try for CNC, but you will very likely have to wait until your case gets assigned to a Revenue Officer in order to actually get a CNC approval.
The Revenue Officer will then work to pick apart your financial information and may make suggestions or demands for how you can cut back on monthly expenses in order to pay something to the IRS. Unfortunately, your debt to the IRS puts the Revenue Officer in a position to make those kinds of demands, because the rules are written to force a delinquent taxpayer to prioritize payment of the tax debt before other debts. I see significantly fewer businesses placed into Currently Not Collectible status than individuals.
Those individuals will more likely be negotiating with IRS Automated Collections. While more inconvenient than a Revenue Officer from a time-consumption standpoint, Automated Collections can be a little easier to deal with, as the operators at the 800 number don’t develop a personal investment in any of the cases they encounter. When you call in response to a notice, plan to wait on hold for thirty minutes or more. Then, you will speak with an operator, who will start by reciting her name and employee number. Make note of those pieces of information because you may need to call more than once, and being able to tell the next operator exactly who you spoke to last time, and what the contents of that conversation were can be helpful.
Those negotiating on personal tax liabilities must also be aware that the IRS can dictate how much you spend per month on certain expenses. The monthly limits are contained in the IRS’s National Allowable Standards for Living Expenses, Local Standards for Transportation, and Local Standards for Housing and Utilities, and can be found by searching irs.gov for “Financial Standards.” The IRS will attempt to hold you to those standards in any negotiations for resolution of a liability, but even more strictly when you are asking them to grant forbearance on collection of the debt.
It is possible to convince the IRS to grant a variance on the standard allowable expenses if you have a compelling reason. For example, a person whose health is so poor that the act moving to a less expensive home would be impossible might have their existing housing and utilities expenses allowed even though they are over the limit. Or perhaps a family with a child with special needs would be granted additional expenses necessary for the child’s care or education. If you can come up with any plausible argument as to why you should be granted higher allowable expenses, go for it! You have nothing to lose by trying, and it might just work.
In any situation where the IRS agrees to designate a balance due as CNC, they will reserve the right to request and review updated financial information from time to time because the debt is not forgiven. For businesses, those financial reviews are usually scheduled at twelve to twenty-four month intervals. If the business is making more net income in one of those financial reviews, it will likely be required to begin making a monthly payment. For individuals, the financial review can be triggered by the passing of a set amount of time, again, usually a year or two, or by the taxpayer reporting more income on their 1040 than they had when the uncollectible determination was made. With individuals, like businesses, a showing of improved financial circumstances in the financial review will most likely result in the requirement for a monthly payment.
Three Aspects of Currently Not Collectible Status:
- First, withholding pertinent information, or providing false information in an effort to negotiate with the IRS is fraud, and could result in criminal prosecution. If the situation is close, but you can afford a monthly payment, don’t fudge the numbers, and you will probably still be able to negotiate a Partial Payment Installment Agreement (an Installment Agreement where the monthly payments are not enough to full pay the entire debt within the collection statute of limitations).
- Second, the ten-year statute of limitations continues to run while the liability is considered noncollectable. I have had clients for whom I have renegotiated Currently not Collectible status every year or two for the entire life of the statute of limitations. At the end of ten years, those clients were able to walk away from their liabilities paying the IRS very little of the assessed balances. One of my colleagues at Fortress once had a client who owed the IRS about $2,000,000 and, thanks to CNC, the client didn’t pay a single penny of it back.
- Finally, I have encountered state tax collectors who have a similar ability to consider the collection of a debt as a hardship to the taxpayer. The states I have dealt with on this particular issue will only make such a hardship determination on an individual liability; never for an operating business. States will also request updated information and perform financial reviews more frequently than the IRS; every six months or so in my experience.
If you owe taxes, but just can’t make a payment, don’t despair, there may be a solution for you in Currently Not Collectible status. Your chances will only increase if you hire a qualified tax resolution professional (not your local accountant, they usually lack experience and expertise in working tax collection cases) to guide you through the process, and help you avoid any pitfalls in the negotiations. For some of my clients, my fee was the only payment they had to make because we showed the taxing authorities that they couldn’t afford to pay their liabilities.
It is extremely important to note that you cannot just forget about the IRS once you are in CNC. If you accrue a new tax liability, you will likely get kicked out of CNC. Likewise, if it is time for your periodic financial review and you fail to respond to the IRS, you will get kicked out of CNC. Those who aren’t paying attention could wake up one day to find their bank account swept or their wages garnished, so pay attention.
Finally, if you qualify for Currently Not Collectible status, there is a good chance you qualify for an Offer in Compromise (tax settlement) or “OIC” for short. In fact, an OIC may very well be a better option for you if you qualify because, unlike CNC, an OIC is a binding contract. In other words, once an OIC is accepted, you simply must adhere to its terms and conditions and the liability will be resolved once and for all. Although CNC is fantastic in the sense that you don’t have to pay the IRS anything (at least for now), the tax liability remains a part of your life for the duration of the collection statute. You will likely be forced to do a series of periodic financial reviews. And, if your income goes up, that increase in income is likely to wind up going to the IRS rather than to you. Yuck! The extra money your hard work earned in terms of a pay raise or increased net income for your business winds up all going to the IRS.
A good tax resolution professional can vet your financials for an Offer and guide you in the direction that is most suitable for your circumstances and needs. Contact Fortress Financial Services, Inc. for all your tax resolutions services.