Tax Solution: Currently Not Collectible
Used When: You’re not currently able to pay off your tax debt due to extreme economic hardship.
For some people, there is truly no ability to pay off a tax debt. These people are in a true economic hardship as defined by the IRS. For people in this category, it would be unconscionable to try to force them to pay their taxes when they cannot even afford their basic living expenses!
For these people, being placed into Currently Not Collectible (CNC) status by the IRS is a great way to resolve their tax issue and get the IRS out of their lives!
Currently Not Collectible (CNC) status means that the IRS will simply stop any effort whatsoever to collect the tax from you. No more letters in the mail, no more levies, no more phone calls from a Revenue Officer or the Automated Collection System call center. They will leave you 100% alone…as long as you remain compliant with future tax requirements, and as long as you remain in an “economic hardship”.
This sounds great, right?
Unfortunately , Currently Not Collectible (CNC) status is extremely tricky for a couple of reasons…you see, unlike other types of tax resolution such as an offer in compromise or installment agreement, Currently Not Collectible (CNC) status lacks permanency. In other words, it’s not a decisive, final end to your tax issue. Rather, it’s just a temporary “hold” on IRS collections activities.
And the other thing? If you cease to be in an “economic hardship” (as defined by the IRS, of course), they will simply pick back up collections activities against you.
Wondering if you qualify for Currently Not Collectible (CNC) status? Read on to see!
Currently Not Collectible (CNC) #1 – Do you meet the IRS definition of “economic hardship?”
Unfortunately, money being tight in of itself does NOT rise to the level of economic hardship! At least, not to the IRS.
The IRS defines “economic hardship” as the complete inability to pay for bare-bones, basic living expenses if the tax was collected.
Sure, having to pay off a past tax liability is almost always going to cause a big pinch to your bank account, and almost certainly will cause hardship to you. BUT, for the IRS to say “your hardship is bad enough that we are actually going to leave you alone”, you must meet their very specific constraints.
The IRS actually decides for you how much they think your basic living expenses are. The IRS makes assumptions about “allowable” expenses based on your location (generally by county). And if your expenses are in excess of these amounts, they will just say “hey, why don’t you cut down your expenses so that you can pay off your taxes?”…and if that happens, you won’t qualify as having “economic hardship”, and therefore will have to pursue another kind of tax relief.
There can be exceptions to these IRS-established expense limit if you have exigent circumstances – such as if you have an ongoing medical condition that requires higher-than-average medical expenses. However, if this is your circumstance, you need to work with a professional to compile documentation and clearly make the argument that the expenses should be allowable.
Currently Not Collectible (CNC) #2 – The benefits of CNC status
Wouldn’t it be great to not have the IRS bothering you about your taxes? With Currently Not Collectible (CNC) status, you can! In fact, built in to Currently Not Collectible (CNC) status is that they will not bother you about your tax debt during the time you are in this status.
The other benefit is that the statute of limitations for collecting your tax debt is not stopped (tolled)! What does that mean?
The IRS has 10 years from the time it assesses a tax to actually collect it, but certain things can cause that statute of limitations to be paused (called a “tolling” of the statute of limitations). An example of when this can happen is if you apply for an offer in compromise: during the months it takes them to decide, the statute of limitations is tolled.
So in other words, with Currently Not Collectible (CNC) status, you get the best of both worlds: the IRS will leave you alone, AND if you wait out the 10 years, they will be come legally prohibited from even collecting the tax to begin with! In which case, you are 100%, totally off the hook for the taxes in question.
Currently Not Collectible (CNC) #3 – The drawbacks of CNC status
Remember I mentioned above that Currently Not Collectible (CNC) status lacks permanency? In other words, when the IRS determines that you do not (or might not) be any longer suffering an “economic hardship”, they can simply revoke the status.
How will they know if your circumstances change?
One is that they may require you to keep submitting financial information about your income and expenses at regular intervals, typically once every 2 years if not sooner.
And the second, of course, is when you file your future tax returns!
And what happens if the status is revoked?
You are right back to where you started!
Currently Not Collectible (CNC) #4 – Who typically benefits?
So let’s put together the key benefits and drawbacks of Currently Not Collectible (CNC) status to come to this conclusion –
- Only allowable if you have economic hardship (as defined by the IRS)
- Can be taken away if your financial situation changes for the better
Therefore, the person who will benefit the most is unlikely to see a change in their economic situation. What I see usually is that people on a fixed income (Social Security, disability, etc) will be most likely to qualify.
Also, in rarer circumstances, you may be a good candidate if the statute of limitations is close to expiring on your tax debt.
I can’t stress this enough: Currently Not Collectible (CNC) status is a GREAT soultion for those WHO QUALIFY…but if you don’t qualify, you should definitely pursue another type of resolution….nothing would be worse than having the problem just erupt another year down the road!