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Applying for Currently Not Collectible Status


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7/22/2018
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Applying for Currently Not Collectible Status

 

Currently Not Collectible (“CNC”) status is available to taxpayers who owe the IRS but can’t afford to pay anything toward their balance because they are suffering from an economic hardship.  If your account is placed in “suspense” the IRS will not take any collection action, contact you, send out notices, garnish wages, levy bank accounts and/or undertake any other collection activity.  But, if your balance is over $10,000, the IRS will place a lien on any assets you have at the time you are placed in CNC status.

An economic hardship which qualifies a taxpayer for CNC status exists if a taxpayer cannot pay reasonable basic living expenses.  Generally, the taxpayer must have no assets or no equity in assets and insufficient income to make any payments toward their tax liability without causing a hardship (i.e., choosing between paying your tax liability and paying other bills).

When IRS personnel place you on CNC status they place Transaction Code TC 530 on the account.  See I.R.M. 5.16.1.2 (01-01-2016).  Upon a determination of CNC status, the Service will immediately release any levies on wages or salary. I.R.C. § 6343(e); I.R.M. 5.16.1.2.9(7).

The IRS will still take your annual tax refund through a “refund offset” if you are in CNC status.  Interest and penalties continue to accumulate while your account is in suspense.

When Can You Get Expedited Currently Not Collectible Status Review?

There are certain situations where a taxpayer can get special treatment and an expedited review. IRS personnel can report an account as CNC without a Collection Information Statement or other supporting documentation if a taxpayer is in one of the following situations:

  1. If the taxpayer has a terminal illness or cancer;
  2. If the taxpayer is incarcerated;
  3. If the taxpayer is on a fixed income that consists only of Social Security, Welfare, or unemployment income; or
  4. If the taxpayer is unemployed and can’t find work and is not a seasonal worker.

Who is a Good Candidate for Currently Not Collectible Status?

If you want to know all the nitty gritty details about filling out a financial statement and reporting your income to the IRS, you can refer to the Financial Analysis Handbook in the Internal Revenue Manual (5.15.1).  But, the short answer is that Currently Not Collectible Status is for people who made some risky financial decisions and/or hit a very bad bump in the road, and literally cannot pay their actual living expenses and also pay down their IRS debt at the same time.  In a hardship case like this, the IRS is not going to make a family choose between paying the mortgage, buying eggs and milk, and paying back taxes.

Buttttttt, and it’s a big but, the IRS does not think you should be driving a Ferrari, living in a Mansion, vacationing in Cabo San Lucas or paying for your child to attend private school while you have a big unpaid IRS debt.  Housing and transportation might be subject to some exceptions, but you better reign in your discretionary, entertainment and luxury spending before asking the IRS for special treatment.  It drives IRS personnel nuts when they see badly delinquent taxpayers who are making iTunes purchases, AmazonPrime purchases, going to Starbucks three times a week, making numerous liquor store runs and eating out often when behind on your taxes. 

“Significant hardship means a serious privation caused or about to be caused to the taxpayer… Mere economic or personal inconvenience to the taxpayer does not constitute significant hardship.” Reg. § 301.7811-1(a)(4)(ii).

The IRS will only allow expenses that fall within certain national and local standards, based on the median incomes and expense profiles from various studies.  The standards are mostly derived from the Bureau of Labor Statistics Consumer Expenditure Survey. The survey collects information from the Nation's households and families on their buying habits (expenditures), income and household characteristics.

Allowable living expenses are called the collection financial standards. There are four sets of standard living expense data:

If your actual expenses exceed these standards, that difference is going to be viewed by IRS as available to pay your tax debt.  Whether you refer to this income as your “discretionary income” or “Reasonable Collection Potential” it is not allowable unless you can demonstrate to the IRS that these expenses are “necessary” for you and your family’s “health, welfare and/or production of income.”  Internal Revenue Manual 5.15.1.7.  For instance, let’s say you are doing some marketing or advertising for your commissioned sales position or having client dinners.  Let’s also say that you or your child have an acute medical condition requiring physical therapy or prescription medicine.  These are things that the IRS will probably consider “necessary” for “health, welfare and/or production of income.”  You will get credit.

So, what if you really like your Maserrati, can’t tell your namesake they have to drop out of Andover or Choate, or aren’t willing to give up your Mansion in Alpine?  Or, more practically, let’s just say you are trapped in a very expensive mortgage.  Let’s face it.  You can’t help the fact that you bought a big house with a big mortgage before you ended up having the misfortune of a downturn in income that turned into an IRS debt.  So, what if your mortgage exceeds the national standards?

Is there any way the IRS will give you credit for these expenses?  There is!  It is called the six-year rule.  If you can full pay the liability with all accruing interest and penalties within 6 years or 72 months, you can utilize excess or “conditional” expenses in determining a monthly payment. 

However, if you are looking at Currently Not Collectible status, owning that Maserrati or having equity in your home can disqualify you.  If you have assets, they must be underwater, or you will either have to sell them or pay something toward your balance—you may utilize the six-year rule—but won’t get Currently Not Collectible status.

The vast majority of installment agreements secured by Collection employees are streamlined agreements, which require little or no financial analysis and no substantiation of expenses.

In cases where taxpayers cannot full pay and do not meet the criteria for a streamlined agreement, six-year rule kicks in. The timeframe for this rule was increased in 2012 from five years to six years.

When You Can’t Pay Diddly Squat, Let Alone Get it Done in 6 Years:  You owe over $25,000 and can’t qualify for a streamlined plan.  Your income is down.  You can’t change your mortgage.  You may even be behind on mortgage payments or in foreclosure.  And yet, you don’t have the money to pay the IRS in 6-years, but you have expenses that exceed the national and local standards.  Who you gonna call?  Fazzio Law Offices, obviously. 

But, more importantly, you may be a candidate for Currently Not Collectible Status.

What Are the Prerequisites to Qualify for Currently Not Collectible Status?

You must generally be in compliance with your tax filing obligations to qualify for CNC status.  Any years that are coded with a “Del Ret” or “delinquent return” designation must generally be filed and resolved or closed appropriately for an IRS agent to report an account as CNC.

Generally, you need to provide the following to be placed on CNC status, in order of importance:

  • Tax Returns (last two years);
  • Collection Information Statement (Form 433-A, 433-B or 433-F);
  • 3 months of paystubs;
  • 3 months of bank statements;
  • 3 months of mortgage statements (or a lease and cancelled checks); and
  • Proof of payment for any unusual or large expenses (for example, medical costs).

Who at IRS Can Report Your Account as Currently Not Collectible?

Revenue Officers (RO), Appeals Officers (AO), and Settlement Officers (SO) can all help you to report your account as CNC.

How Long Does Currently Not Collectible Status Last?

These cases are reviewed periodically, and generally every two (2) years.  But, you will also get kicked out of CNC status if you file a tax return that shows an increase in income or if certain receipts from a 401(k) or retirement account, litigation settlement, or other 1099 payment shows up in the IRS system.

What Are the Different Circumstances IRS Personnel Are Trained to Evaluate for CNC Status?

  • Defunct Corporation (Code 10)
  • Unable to Pay/Hardship (Code 24-32)
  • Bankruptcy (Code 7)

Short Statute Issues and Imminent CSEDs?

The IRS has 10 years to collect any delinquent tax liabilities for any particular tax year.  IRS personnel are trained to watch out for imminent Collection Statute Expiration Dates (“CSED”) where the IRS has less than 12 months to collect the remaining debt.



Category: Tax Law


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