09. Currently Not Collectible - How To Stop IRS Collections

You’ve filed your tax return - you have a balance due - the IRS has sent you all kinds of notices - now you’ve been told your account is in “collections” and that the IRS will attempt to seize your assets and garnish your wages.  You don’t have any assets to speak of and your income is spent each month - you can’t pay!  Maybe in a year or two you’ll be back on your feet financially but for now you have nothing left at the end of each month.  What can you do?

One option for taxpayers in this situation is to request that you be considered “currently not collectible” (CNC).  

OK - so what does this mean?

Status as CNC basically results in putting the IRS “at bay” for a period of time.  While you are considered CNC the IRS won’t seize any assets.  Meanwhile the ten year period for collections (the statute of limitations) continues to run on your account.  This strategy does not result in a reduction in your tax debt - and interest and penalties still run while in CNC status. 

As with all other collection alternatives you’ll first need to compute your “reasonable collection potential” (RCP).  You need to demonstrate to the IRS that pursuing collection against you will result in financial hardship.  As discussed in previous posts the RCP computation is an inventory of your assets and a projection of your future income - using IRS guidelines.

If your RCP computation indicates that you have no assets that the IRS would attempt to seize and no available income the IRS will consider placing you in CNC status.  This status is not indefinite. 

If you’ve read our previous posts you know that in certain circumstances the IRS will reduce the amount owed - through the Offer In Compromise (OIC) program.  Many taxpayers who qualify for CNC status may also qualify for an OIC.  Since an OIC results in a permanent debt reduction why would CNC be chosen over OIC?

Here’s are some of the reasons:


• No ability to make payments - an OIC requires that payments be made upon submission of the offer - with future payments agreed to be made - if you don’t currently have the means to make any payments CNC status allows for no payments

  
  
• You can run out the Statute of Limitations - as discussed in previous posts the IRS typically has a ten year period to collect tax - if your tax debt is approaching the end of this period status as CNC may allow for the period to expire - i.e. the IRS would no longer pursue collection - note that this strategy may not work if you have equity in real estate 

  
  
• Equity in assets may not be included in the RCP computation - for OIC purposes net equity in real estate is considered in the RCP computation - for CNC purposes the ability to access the equity is considered - i.e. the taxpayer cannot obtain a home equity loan and the only means to access the equity is through a sale of the real estate which would cause a hardship - we usually recommend that our clients apply for several home equity loans with the view that any denials can be used to argue for CNC status

  
  
• OIC without compliance - in order to be considered for an OIC the taxpayer is required to be “in compliance” - this means all required tax returns have been filed and payments are being made towards any current year liability (through wage withholding and/or estimated tax payments) - compliance is not required for CNC status - for taxpayers who would otherwise qualify for an OIC but for compliance and also qualify for CNC status one option is to obtain CNC status currently - in order to halt collection activities - buying time for the taxpayer to get in compliance and file for an OIC

  
  
• Dissipated assets - the concept of “dissipated assets” is related to transfers of assets for less than full value or use of funds for items other than “the payment of items necessary for the production of income or the health and welfare of the taxpayer or their family” after federal income tax has been assessed (and for the period that begins six months before assessment) - in other words funds were used to pay for non-necessary expenses that could have been used to pay down the tax tax debt - in evaluating OIC requests the IRS will generally look back over a three year period for dissipated assets - status as CNC could put off collection activity until after this period so that an OIC could be pursued 

As mentioned CNC status is not indefinite.  The IRS will monitor your future tax returns and review your status if the returns reflect an increase in income.

If the IRS determines that your account is no longer eligible for CNC status (i.e. due to an increase in income) the status of your account will no longer be CNC.  Instead of providing a notification to the taxpayer in these situations the IRS just makes a demand for payment with the threat of levy and seizure.  

But don’t panic - all collection resolution options are on the table - including providing updated financial information which indicates a continuing inability to make payments (i.e. get back in CNC status), installment agreements, offer in compromise, etc.

Note that even with CNC status the IRS may file a Notice of Tax Lien.  This is done to protect the government.  In the event an asset is sold the IRS wants to ensure a public notice of the tax debt in order to enforce their rights to any sales proceeds.  Generally the notice will not be issued for debts of $10,000 or less.  

CNC status can be used as an effective tool in dealing with your tax debt.  If the requirements are met enforced collection activity can be stopped - allowing some breathing room from the IRS - perhaps until the statute expires, you can get in compliance in order to file an offer in compromise, or just allow for some time for your financial situation to improve so that you can settle the tax debt.

In our next blog post we’ll discuss the IRS Innocent Spouse rules.

Link to Outline Slides:  CNC Outline

Link to Video:  CNC Video