Resolving a taxpayer’s tax debts with the IRS usually falls into one of three major categories. These three settlement options are offers-in-compromise (OIC), installment agreements (IA) and currently-not-collectible (CNC).
What You Need to Know About CNC
IRS Currently Not Collectible is defined as the decision the IRS takes in concluding that a taxpayer has no ability to pay their annual federal income taxes. In fact, IRS Form 12153 lists three collection alternatives: Offer in Compromise, Installment Agreement, and “I Cannot Pay Balance”. It is the “I Cannot Pay Balance” that is the focus of this blog.
How Does a Taxpayer Get the IRS to Declare CNC?
In order for a taxpayer to receive CNC status, the taxpayer must demonstrate a severe financial economic hardship that he/she does not have the financial means to pay his/her IRS debt after accounting for his IRS-allowed expenses. He does this by providing written evidence of his inability to pay. The evidence will include the submission of IRS Form 433-A to an IRS Revenue Officer or 433-F to the IRS Automated Collection System. These forms are different, but very similar, IRS Collection Information Statements (CIS).
The IRS will also require several months of paid invoices to substantiate the expense amounts shown on the CIS as well as proof of monthly gross income. In addition to analyzing the taxpayer’s monthly income available to pay the IRS (gross monthly income less IRS allowable expenses), the IRS also considers the liquid fair market value of the taxpayer’s assets less the debts associated with those assets.
If the IRS determines that the taxpayer has no income remaining after the offset of IRS allowed living expenses and has no assets that can be liquidated to satisfy the IRS outstanding debt, the IRS realizes that its collection efforts would be fruitless at the time the CNC status is granted.
If the account is deemed collectible per the FIS, then the IRS will request payment terms based on its analysis of the taxpayer’s financial situation. Thus, great care needs to be taken when submitting the IRS Form 433-A or 433-F to properly reflect the taxpayer’s ability to pay based on IRS published and unpublished criteria. This is where a tax resolution specialist can be very valuable.
What Happens When the IRS Declares a Taxpayer as CNC?
Once a taxpayer is declared IRS CNC, the IRS stops all collection activities, which include issuing levy and garnishment orders. However, you will still be subject to federal tax liens on your home and other property.
The IRS will send the taxpayer an annual statement outlining the outstanding taxes due by tax year. During the period the taxpayer is in CNC, interest and penalties continue to accrue increasing the total tax debt.
On the other hand, the IRS’s 10-year statute of limitations to collect the tax (and associated interest and penalties) continues to run. Thus, if the taxpayer is unable to pay his tax debt and the IRS fails to collect the balance due it within the Collection Statute Expiration Date (CSED) of 10 years from the date of assessment of the tax, then the taxpayer will not need to repay his tax debt (unless the IRS filed a tax judgment with the courts).
It is important to note that CNC is NOT a permanent form of tax debt resolution.
Once the IRS grants a taxpayer CNC status, the IRS will continue to review and monitor the taxpayer’s financial situation to determine improvement and ability to pay taxes owed. The IRS views CNC status as a temporary fix to allow the taxpayer sufficient time to create a household budget that will allow the repayment of his tax debt.
The IRS will monitor the taxpayer’s income tax return filings and third-party income information statements such as W-2s and 1099s to determine if the taxpayer’s income has sufficiently increased to enable the repayment of any portion of the taxpayer’s IRS debt. If the taxpayer sells property, the proceeds will go towards paying off your taxes, interest and penalties. This is the reason why the IRS reserves the right to place liens on the taxpayer’s property during CNC status so that it will be alerted when a sale is contemplated by the taxpayer.
Generally, the IRS will require a periodic resubmission of its CIS and a redetermination will then be made as to the taxpayer’s ability to pay the IRS. Usually, the IRS reviews the taxpayer’s CNC status for a period not exceeding two years. If you are on a fixed income (e.g., social security, disability, pension, etc.), a taxpayer could conceivably remain in CNC status until his tax liabilities expire due to the 10-year statute of limitations.
As a condition of being placed in CNC, the taxpayer agrees that any overpayments reflected on future-filed tax returns will be applied by the IRS in satisfaction of the taxpayer’s IRS debt, and that the taxpayer will timely file all future tax returns.
Once a taxpayer is placed in CNC status, we recommend that the taxpayer continue to maintain a rotating six-month summary of his income and expenses with substantiating documents. If for some reason the IRS were to terminate ones CNC status with no warning, having this six-month summary of income and expenses would enable the taxpayer to quickly appeal the IRS decision.
If you owe the IRS and believe that you may qualify for the CNC status, you are welcome to contact us using the contact information on this site. We can help screen you to determine if IRS currently non-collectible status is right for you.
We strongly recommend that a taxpayer with IRS tax debt consult with an IRS tax resolution specialist. To resolve IRS tax debts can often be a very time-consuming and an arduous process. It often is not a black or white process, but there are several shades of grey that a specialist knows how to present to the IRS to best present the taxpayer’s financial situation.
If you would like to discuss your IRS or PA tax debts, or business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander, an Enrolled Agent and a Certified Tax Resolution Specialist, is an affiliate member of the Suburban West Realtors® Association, a member of the American Society of Tax Problem Solvers (ASTPS), PA Society of Tax & Accounting Professionals (PSTAP), the National Society of Accountants (NSA) and the National Association of Tax Professionals (NATP). He is the author of “How to Resolve Your IRS Tax Debt Problems” as well as a book on how to start your own business. He has been practicing in Exton for 20 years. His firm serves clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
For individual tax payers, real estate professionals, contractors and other self-employed individuals with IRS tax debt issues or tax planning issues, feel free to contact me at (610) 594-2601 or by email at email@example.com.
Keystone Financial Solutions, Inc. specializes in providing innovative tax planning, tax preparation, and solving IRS tax debt problems. The company’s web site is https://www.keysolutions.us and its telephone number is (610) 594-2601.
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