If you or your business have gotten behind with the IRS, a tax settlement, also known as an Offer in Compromise (OIC), might be the best way to get rid of your tax liability—if you qualify. There are three general categories of OICs: Doubt as to Liability (I don’t actually owe this tax), Effective Tax
The Currently Not Collectible Status (“CNC”) is a status that the IRS can grant to individuals or businesses whom it has determined are unable to repay their delinquent taxes. Internally, the IRS sometimes refers to Currently Not Collectible Status as “Status 53.”
Although penalties and interest will continue to accrue on the unpaid taxes, the IRS generally will not take enforcement action such as bank levies, wage levies (garnishments), seizure of assets, and accounts receivable levies while a taxpayer’s account is in CNC status. However, the IRS will very likely file a Notice of Federal Tax Lien for liabilities in excess of $10,000 (if it hasn’t already) prior to granting CNC status.
The IRS has a laundry list of reasons why it might place a taxpayer into CNC, most of which aren’t applicable to a business or individual who is actively looking for relief from the IRS (taxpayer is deceased, business entity is defunct or bankrupt, unable to locate taxpayer, etc.).
For the rest of us — operating businesses and living individuals who haven’t vanished — obtaining CNC status will require two things:
- The taxpayer must be in compliance with all current tax obligations (e.g. all tax returns have been filed, current tax obligations are being paid); and
- The taxpayer must demonstrate, usually via full financial disclosure, that it is able to pay current tax obligations, but unable to pay anything towards the tax debt. For individuals, this means that the individual will not be able to meet their necessary living expenses while repaying anything toward their tax liability. For businesses, this means that the business will not be able to meet its necessary business expenses while also repaying anything toward its tax liability.
Advantages of CNC
- The taxpayer can live without fear of IRS enforced collection action; and
- The taxpayer will not be required to make any payments whatsoever towards their back tax liability to the IRS while they are in CNC status; and
- Taxpayers who succeed in staying in CNC status until the IRS’s Collection Statute of Limitations expires (typically 10 years from the date the tax was assessed) can have a tax liability go away without ever having to pay anything towards it.
Disadvantages of CNC
- Qualifying for CNC can be challenging—the IRS will often demand payment even when an individual or business thinks they are too broke to pay anything; and
- It is not a “permanent” solution, meaning that the IRS may periodically review the taxpayer’s financial condition and remove a taxpayer from CNC status if it deems fit. If a taxpayer’s financial condition improves, the IRS may remove the taxpayer from CNC status and require payment. If the IRS requests updated financial information and the taxpayer fails to provide it, the IRS may remove the taxpayer from CNC status and proceed with enforcement.
Attorneys vs Accountants
Which is Best for You?
One of the most frustrating situations my clients confront is the IRS’s addition of large amounts of tax or Civil Penalties to tax periods that ended a long time ago. There can be several reasons for additions to tax or Civil Penalties, but the most common ones I encounter are reporting and reconciliation deficiencies across
April 15th is right around the corner, and if you expect to owe 1040 income tax, but don’t have the resources with which to pay it, you are in the same boat as many Americans. First of all, don’t panic. Federal officers are not going to show up at your home on April 16th to