What is CNC Status with the IRS?
Currently Not Collectible status exists to protect taxpayers from the aggressive tactics of the IRS Collection Division.
People unable to pay off their annual federal income taxes generate a tax debt (back-tax liability). Those people, likewise, have other debts or obligations that they are struggling to meet. Currently Not Collectible (CNC) status is a tool for the IRS to give those individuals time needed to adjust their financial situations to balance their budgets and incorporate the tax debt as one of their expenses. The idea is this temporary reprieve will be a win-win: a win for the taxpayer-individual, in that they can focus on their other expenses and liabilities first, balance their budget, and get to a point where they can pay off their taxes. And a win for the IRS, who will have flagged the taxpayer-individual as being an account that presently does not have the stream of income or assets to pay their present liability, so collection resources should not be devoted to him or her.
If you qualify for CNC status, you also will not be subject to levies (which freeze your income or lock your bank accounts). Formally, CNC status indicates to the IRS that you are serious about your responsibility to pay off taxes you may owe but do not have the funds to pay at this time. But informally it has the hidden benefit of permitting some taxpayers to get lost in the IRS system and never have to pay back the balance owed.
Benefits and drawbacks of Currently Not Collectible status
CNC status is not intended to be a permanent form of tax debt resolution. It is solely designed to protect you from the aggressive tactics of the IRS Collection Division. If you qualify for CNC status, you will not face levies (which the IRS uses to garnish your wages or put a lock on your bank account until the taxes are paid). However, you will still be subject to federal tax liens on your home or property (if either is sold, some of the money will go to the government to pay off your taxes).
You will also be subject to IRS-imposed interest and penalties, which will continue to build up. Additionally, once you have been granted CNC status, the IRS will continue reviewing your financial situation to see if has improved. The IRS will monitor your financial situation by reviewing reports from third parties (e.g. employers, banks, etc.). If your income increases, you may no longer be eligible for CNC status.
However, this financial review doesn't apply if you're on a fixed income (e.g. disability, pension, Social Security, etc.). Additionally, the Collection Statute Expiration Date—the deadline (Satute of Limitations) for the IRS to collect any tax debts, or CSED—for your tax liability continues to run while you are in CNC status. This is particularly beneficial if you have older tax liabilities that are about to expire.
Many taxpayers in CNC status can remain there until all of their tax liabilities expire.
Who is eligible for Currently Not Collectible status
Any taxpayer with an IRS tax debt is a potential candidate for CNC status.
What matters is: (1) your gross monthly income (what you bring in before taxes and/or other deductions), (2) your allowable monthly expenses (expenses related to life, health, welfare, or the production of income), (3) liquifiable assets (how much money you have that you could easily send to the IRS today), and (4) your total IRS back-tax liability. If your allowable monthly expenses exceed your gross monthly income and your liquefiable assets are considerably less than your total IRS back-tax liability, you will likely qualify for Currently Not Collectible status.
How to apply for Currently Not Collectible status
(Optional) Contact a tax attorney who specializes in resolving IRS back-tax liability. A competent attorney will review your financial situation for free to determine whether pursuing Currently Not Collectible status is worthwhile; if hired, he or she will also take care of the rest of this process.
Contact the IRS and confirm that all necessary returns have been filed. Also get an updated balance due (with penalties and interest) through the current date (who knows, you may be able to afford to pay it off right away).
If you have not filed some tax returns, prepare and file those immediately. Pay the associated balance due on the return (once you file your missing returns, any eligible refund may be enough to pay your liability in full).
If you still have IRS back-tax liability after taking those steps, do the following:
Gather the last 3 months' worth of paycheck stubs and bank statements. You will need them when you call the IRS later.
Complete IRS Form 433-F. This will help determine whether your gross monthly income exceeds your allowable monthly expenses and if you have enough liquifiable assets (e.g. checking account funds, cash in hand, etc.) to pay your liability in full.
If you have equity available in valuable real estate/property, make two attempts at two separate banks to borrow against that equity (per parcel of property). You will need to prove that you attempted to borrow against property equity when you call the IRS later.
Call the IRS again and state that you would like your account to be placed in Currently Not Collectible status.
After you apply for Currently Not Collectible status
If you or your attorney is able to get a second call, the IRS representative will ask some questions to verify your income, expenses, and assets. The representative will then use a form similar to IRS Form 433-F to complete its calculation. At the end of that call, you will be told what your financial information indicates you can afford to pay. If you cannot afford a monthly payment, you will qualify for CNC status.
If you are already facing an IRS bank levy or IRS wage garnishment, ask for it to be released immediately. Be prepared with appropriate contact information so that the release can be faxed over immediately.