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Let’s assume that you owe the IRS $20,000 for back taxes. You recently lost your job and are receiving unemployment which barely covers your basic living expenses. You have next to nothing in your bank account and minimal other assets. There is no way you can make any monthly payment toward your liability. What will the IRS do in this situation? Hopefully you or your representative can convince the IRS your case should be classified as Currently Not Collectible.

What is Currently Not Collectible status?
Currently Not Collectible (often referred to as “CNC”) is a case status reflecting the IRS’s conclusion that a taxpayer has no current ability to pay their delinquent federal income taxes.

Generally, the IRS will place a taxpayer’s case in this status for one of two reasons:  

  • The IRS has contacted the taxpayer (either directly or through their representative) and obtained evidence the taxpayer currently lacks the income or assets to reduce their liability, or  
  • The IRS has been unable to locate the taxpayer, or any of the taxpayer’s assets.

Before a taxpayer’s case is placed in CNC status, the taxpayer will be required to submit a Collection Information Statement – basically, a financial statement – on either form 433-A or 433-F. These similar forms list the taxpayer’s current monthly income and expenses as well as their assets and liabilities. Once completed, the form will be submitted by the taxpayer or their representative to the IRS function or employee assigned the case. Often, the recipient of the form will be the Service Center Automated Collection System (“ACS”) function or a Revenue Officer who works out of a field office near the taxpayer’s residence or place of business.

What does the IRS do when a taxpayer’s case is in CNC status?
Once the IRS classifies a taxpayer as CNC, the IRS stops all collection activities including issuing levies to take money from third parties such as banks. The IRS may still file a Federal Tax Lien if the taxpayer owns real property or if the liability is substantial. The IRS will mail an annual statement to the taxpayer listing the outstanding tax years with liabilities and their current balance due. There is no expectation by the IRS that the taxpayer will make any payment upon receipt of the annual notice.

How long will a taxpayer’s case be left in CNC status?
Generally, the IRS will leave a taxpayer’s case in CNC status for one or two years. That determination will be made by the employee who reviewed the taxpayer’s financial situation. If that employee believes the taxpayer’s situation could change soon (such as finding a new job), then the case will be scheduled to be reviewed in a year. If the case is old and the collection statute of limitations is close, the shorter period will be selected.

However, if during the one- or two-year period, the taxpayer files another return with a balance due and unpaid, that could cause the CNC status to be terminated and the case activated for review and potential enforced collection.

Is there a point in time when the IRS can no longer pursue an outstanding tax liability?
Congress limited the IRS’s time during which they can pursue a taxpayer for an unpaid liability. This is referred to as the Collection Statute of Expiration (CSED). The 10-year clock begins with the later of the return’s due date including any timely filed extension or when the return is actually filed if it was delinquent and ends 10 years later. There are several situations that will suspend the clock. One example is the taxpayer’s filing for bankruptcy relief.

Assuming the tax year is one that is not dischargeable, the clock stops when the taxpayer files their petition with the Bankruptcy Court and will start again at the end of six months following the Bankruptcy Court’s final determination. The reason for stopping the statute clock is that the IRS is prohibited from enforcing collection when the Bankruptcy Court has jurisdiction over the taxpayer’s financial situation. Congress felt that it was unfair to have the 10-year statute clock continue to run during any period when the IRS legally was unable to enforce collection.

Once the CSED has been reached, the IRS will “write off” the liability and can no longer enforce its collection. Similar to a bankruptcy discharge of a liability, the cancellation of an IRS debt due to the running of the statute of limitation is not considered income (unlike the cancelation of other debts such as credit cards).

If your present financial situation merits a determination of CNC status, I will pursue negotiation with the IRS (as well as state tax agencies most of who also have a similar status) to get you into that case status to give you the opportunity to improve your situation without worrying about the IRS enforcing collection.