Let’s say you owe the IRS a significant tax debt but no longer earn an income or barely enough to afford room and board while possessing no significant assets. Can the IRS force you to pay? Or can they take the shirt off your back? Can they take every penny you earn and leave you breadless? The answer is no because of payment deferral or CNC Status.
There are limits to what the IRS can do regarding financial hardship or even abject poverty. The IRS cannot squeeze someone in indigency for savings they do not have, the same way you cannot squeeze blood from a stone. When a person qualifies for severe financial hardship or fulfills specific other financial requirements, they receive payment deferral and become uncollectable.
Being uncollectable in the eyes of the IRS acts as a payment deferral – meaning the IRS cannot ask you to pay your back taxes. The catch? There is none, except that being uncollectable is usually temporary, and the IRS will demand payment – with penalties and interest – once your finances improve. There are a few other key pieces of information to keep in mind.
Why Is Payment Deferral Necessary?
Qualifying for CNC, or payment deferral, requires the IRS to determine that you cannot reasonably pay them, even monthly, for what you owe in taxes. This does not preclude you from continuing to do your duty as a taxpayer, including filing your tax returns.
To qualify for payment deferral, you must contact the IRS and request CNC status. The IRS will require you to fill out an IRS Form 433A or 433F to take a closer look at your financial details. If you meet eligibility, they will leave you alone, so to speak.
Eligibility depends on the circumstances you are in. The main qualifier for payment deferral is “financial hardship.” This generally comes down to: can you afford to give the IRS anything without struggling to pay for food and a roof over your head?
What Qualifies as Financial Hardship for Payment Deferral?
More concretely and less dramatically, the IRS will determine eligibility if your financial information indicates that making any monthly commitment towards your tax debt will realistically result in “serious privation,” meaning you likely cannot afford food, rent, utilities, or other basics. The individual threshold the IRS sets for these expenses depends on your sources of income, the number of dependents you have, and where you live.
If you qualify for any refunds or tax breaks, the IRS will automatically take these and deduct them from your debt or hold onto them until your tax debt is paid off. If you don’t earn enough income to incur income taxes, then your tax debt will not increase – but if you incur additional tax debt, you can call the IRS to roll it into your existing total debt and continue to adhere to the CNC status.
Your tax debt does not stand still while you are uncollectable. It will grow due to penalties (failure to pay the penalty is about 0.5 percent per month and will be, at most, a total of 25 percent) and the quarterly interest rate. If you owe more than $10,000, the IRS will place a tax lien on you and your tax account.
How Often Does the IRS Test Collectability?
After closely examining your financial information, the IRS will usually attach a qualifying flag to your tax account. This basically means that as your situation improves, the IRS will be automatically alerted on your next tax return and may resume its collection actions against you until you decide to start a payment plan.
The IRS determines whether you are ready for collection via your gross income, or your Total Positive Income, as reported on your tax return. If you do not send in a tax return, the IRS will use information returns from other institutions – such as banks, businesses, and so on – to make an educated guess. If your finances did not improve within a given tax year, the IRS would be forced to keep you in an uncollectable status.
Can You Avoid a Tax Levy With Payment Deferral?
You cannot avoid a tax lien while Currently Not Collectible – but you can avoid levies. The IRS cannot claim assets you do not have and cannot issue a bank levy if it means you won’t have any money left to pay for water or electricity the next month. The IRS cannot start garnishing your wages if you don’t earn enough to meet their threshold for wage garnishment.
In general, a CNC status keeps the IRS from issuing any serious collection actions against you. But it is a temporary measure. The point is to keep tabs on you while you work your way out of your situation and to where the IRS can collect its debt.
Can Your Tax Debt Expire While Currently Not Collectible?
There’s no point in keeping tabs on someone who will never be able to pay back their debt. The IRS does let the timer run out on your debt while you are uncollectable in CNC status, provided you are continuously struggling financially.
While this does mean you can avoid paying back tax debt, the circumstances under which you can do so require you (and any loved ones that live with you) to live on the bare minimum for multiple years. It is always better to work on an offer in compromise if the option is open to you.
What If I Can’t Pay?
Your tax debt is not set in stone. Working with a tax professional at Rush Tax Resolutions can help you open doors towards alternative tax debt resolution options, such as a partial payment plan or an offer in compromise.
Currently not collectible statuses, offers in compromise, and other payment plans all use the same Collection Information Statement forms to determine eligibility, with a few unique questions between them. Nevertheless, getting the IRS to agree to a limited back payment rather than waiting for your financial situation to improve further can be difficult. You may need to check in with a pre-qualifier tool or talk things through with a tax professional to determine if your circumstances are right.