Many taxpayers acquire tax debt because they simply cannot afford to pay the IRS and maintain basic living expenses. When this is the case, the IRS will place the account in currently non-collectible status (CNC).
CNC status amounts to a temporary forbearance of any IRS collection activity.
The IRS halts collection because seizing the taxpayer’s funds would leave that person unable to pay for basics, such as housing, food, medicine, and transportation.
For distressed taxpayers, CNC status is a lifeline. Without it, the IRS could engage in collection strategies that are enormously damaging, including the following:
- Wage garnishment
- Bank account levies
- Property seizures
Once the IRS places your account in CNC status, these collection activities are temporarily off the table. The IRS has a policy of reviewing the status when the taxpayer’s income increases by a certain amount. Once it deems CNC status is no longer applicable, the taxpayer can avoid collections activity by paying the past-due taxes, entering into an installment agreement, or negotiating an offer-in-compromise.
Who qualifies for non-collectible status?
The IRS must determine that the taxpayer would suffer “privation” if he or she was forced to pay the back taxes. As with most things involving the IRS, there are bureaucratic qualifications a taxpayer must meet to qualify.
These are the general qualifications:
- Income under $84,000 a year
- Living expenses fall within IRS guidelines
- The taxpayer has little or no money left at the end of the month after paying your basic living expenses
- The taxpayer’s only income is from Social Security benefits, welfare benefits, or unemployment benefits.
- The taxpayer is unemployed and has no other source of income.
If you meet at least one of these criteria, you may qualify for CNC status, but there is an additional test based on income and reasonable living expenses.
The taxpayer must have insufficient income compared to reasonable living expenses. Just being short of money compared to your monthly bills is not enough. Many households are short of money because of excessive spending habits. If the IRS determines your shortfall is due to overspending on nonessential items, it will deny a CNC request.
For example, Taxpayer A might be unable to afford taxes because he or she bought a home with a $5,000 per month mortgage that is valued far above the average home cost in the area. A luxury home is not a necessity; therefore, the IRS would not consider this taxpayer uncollectible.
In fact, the IRS uses its own formula to determine the essential cost of living in the taxpayer’s area and uses that to determine a maximum income amount for CNC status. For example, the IRS may consider $20,000 per year as the reasonable cost of living in a certain geographical area, so taxpayers with incomes above that, even if they have little or no money left after paying their bills, would not qualify for CNC status.
How a tax professional can help you qualify for CNC status
Tax professionals know the requirements for CNC status. They can analyze your financial situation and determine if you qualify. If you do, it is worth noting that CNC does not relieve you of the debt, and penalties and interest still accrue. For these reasons, it may be in your best interest to enter into an installment plan or negotiate an offer-in-compromise to reduce your tax debt, provided you can find the funds to make payments without undue hardship.
What happens when CNC status ends?
IRS policy is to review CNC status when the taxpayer’s income (according to the most recent tax return) exceeds a certain level. When it puts a taxpayer into CNC status, the IRS creates a code, which is the amount of income that will trigger a reevaluation of CNC status. For example, if the IRS determines a taxpayer’s essential living expenses are $20,000 per year, it might use the code $22,000 and reevaluate the status when the taxpayer reports income above that.
Once a CNC designation ends, the IRS can engage in its normal collection processes. This involves sending the taxpayer a notification and, if the tax debt is not resolved by a certain date, the IRS will start collections proceedings. To avoid potential wage garnishments, bank account levies, and property seizures, the taxpayer can set up an installment plan or negotiate an offer in compromise that fully settles the tax debt.
CNC status is a lifesaver for taxpayers suffering from financial hardship. By qualifying for CNC status, taxpayers gain the breathing room they need to maintain an essential standard of living despite owing tax debt. Usually, once their finances improve, taxpayers are then able to settle their tax debt through an installment plan or offer in compromise.
Settling tax debt with the IRS or a state tax agency is a frustrating and intimidating task. Contact our experienced Tax Resolution Law Firm in the Detroit area for help. Our Tax Resolution Attorneys are experienced in all matters including tax resolution, tax dispute, and general concerns relating to IRS tax and debt relief. Our lawyers are extremely knowledgeable in the local, state, and federal tax code, and can help you today. Call for a consultation and get started on settling your tax debt.
