Yesterday was the day many taxpayers sealed the deal by filing a tax return with a balance. For a lot of these taxpayers, it’s business as usual – some will pay off the bill in time with a few lump sum payments or through an Installment Agreement, while others will let it go into collections and pretend it doesn’t exist. The luckiest taxpayers will qualify for an Offer in Compromise, an agreement with the IRS to settle a tax debt for less than the full balance owed.
Another option fails to get the same amount of attention as the above – Currently Not Collectible status (CNC). Also known as a hardship status, CNC serves as a temporary pause on IRS collection activity for unpaid tax balances. It’s like freezing your tax debt in time, with a few small caveats.
Qualifying for CNC requires the taxpayer to show that he cannot make any payments towards his tax debt because his monthly allowable expenses exceed his monthly income, and there’s nothing he can sell to fully satisfy that tax debt.
My overly-simplified explanation probably doesn’t do it justice. Qualifying for CNC is actually a little trickier than it seems.
Let’s start with expenses. Plenty of Americans live paycheck-to-paycheck. But the IRS doesn’t actually see it that way. Rather, the IRS uses a complex combination of the taxpayer’s actual expenses, national standard expenses, and local standard expenses, depending on the type of expense. And by the way, the IRS doesn’t recognize every expense as allowable. For example, school tuition and rental home mortgage expenses won’t be considered. So, while a taxpayer may truthfully have no money leftover at the end of the month that can be paid towards the tax bill, the IRS may respectfully disagree.
The IRS will also want to know the value of the stuff that you own. Specifically, the IRS will want to know if the sale of the stuff that you own will cover the tax bill without causing hardship.
Compare CNC with an Offer in Compromise. For an Offer in Compromise, the taxpayer is essentially asking the government what it’ll take to settle the tax debt. The IRS will come back with a dollar figure based on how much it believes it can collect from the taxpayer for the life of the tax debt. The taxpayer asked, the IRS answered. In the case of an Offer, the IRS cares not about hardship.
The concept of hardship, by contrast, is relevant when negotiating CNC; the taxpayer bears the burden of showing the IRS that paying the tax bill, through discretionary income or by selling or otherwise borrowing against an asset like a home, would cause significant financial hardship.
So what are a few pros and cons of CNC?
One positive outcome is that the IRS doesn’t come looking for payment. This outcome is a massive victory, albeit temporary, for taxpayers who just need time to get their finances in order.
The collection statute expiration debt – the amount of time the IRS has to collect on a tax debt – also continues to run. Theoretically, if a taxpayer’s financial situation never improves, the hardship may continue until the IRS writes the tax debt off.
Speaking of financial situations improving, CNC is temporary. The IRS will monitor the taxpayer’s account every two years and, if the taxpayer’s financial situation improves, the taxpayer will no longer be in hardship and collection action will resume.
Also, the IRS may file a lien to protect the government’s interests after granting hardship.
Finally, interest and penalties will continue to accrue even while in CNC.
Navigating the maze of a Currently Not Collectible status can be tricky. If you think you might qualify for a temporary hardship with the IRS, you should consult with a tax professional.
As a Matter of Tax 