Taxpayers that cannot afford to pay their unpaid taxes can apply for a temporary hardship status called Currently Not Collectible (CNC). This is one of various collection alternatives that are available when dealing with the IRS. The taxpayer will have to disclose their assets, liabilities, income and expenses. If no assets or equity in assets are available to pay down the debt, the only factor will be the net monthly disposable income. Expenses are based on IRS standards, not actual expenses incurred by the taxpayer.
Currently Not Collectible (CNC) is a great option for unemployed and underemployed individuals experiencing a hardship with little or no income, assuming they do not have assets that can be tapped. Currently Not Collectible (CNC) is also beneficial for the employed as well. The key is that they have little to no monthly disposable income left to pay their unpaid taxes. An example is a married couple that both work and have two children. There are more allowable expenses the larger the household. Since the spouses have to support themselves as well as their dependent children, they may qualify for Currently Not Collectible (CNC). They just have to crunch the numbers to find out.
Benefits of Currently Not Collectible (CNC) include:
1. Suspension of levies on items like wages and bank accounts.
2. The Collection Statute Expiration Date (CSED) will continue to run. This could lead to the taxes being forgiven if the CSED ends during Currently Not Collectible (CNC) status.
3. All unfiled tax returns do not have to be filed, i.e., tax compliance is not required.
The drawbacks for Currently Not Collectible (CNC):
1. There will be a tax lien determination if the unpaid taxes are greater than $10,000.
2. Future refunds can be seized by the IRS to pay for the unpaid taxes.
3. Penalties and interest continue to accrue.
4. Periodically the IRS can check if taxpayer assets or income increased leading to removal from Currently Not Collectible (CNC) status due to the ability to make payments towards the unpaid tax liability.
As a result of COVID-19 the IRS has suspended tax collection enforcement for most taxpayers with unpaid taxes. It is likely that collection activity will return to a more normal level at some point in 2021. When that happens, the number of taxpayers unable to pay their tax balances in full and requiring a collection alternative is going to skyrocket. Currently Not Collectible (CNC) will be one of the best options for a significant percentage of these hardship cases.