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Currently Not Collectible

Let’s assume that you owe the IRS $20,000 for back taxes. You recently lost your job and are receiving unemployment benefits, which barely cover 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 (CNC) is a status. It reflects the IRS’s conclusion that a taxpayer cannot currently pay their delinquent federal taxes.

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

  • They currently lack the income or assets to reduce their liability.  
  • The IRS has been unable to locate the taxpayer or any of the taxpayer’s assets.

A cnc-status case requires the taxpayer to submit a Collection Information Statement. It should be on 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. After completion, the taxpayer submits the form to the IRS function or employee assigned to the case. Often, the form recipient will be the Service Center Automated Collection System (“ACS”) function or a Revenue Officer who works near the taxpayer’s residence or work.

What does the IRS do when a taxpayer’s case is in CNC status?
Once the IRS classifies a taxpayer as CNC, collection stops. This includes 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. It also applies when the liability is substantial. The IRS will mail an annual statement to the taxpayer listing the outstanding tax years, their liabilities, and the current balance due. The IRS does not expect the taxpayer to 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, a 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 to be activated for review and potential enforcement collection.

Is there a point in time when the IRS can no longer pursue an outstanding tax liability?
Congress limited the IRS’s time to 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 the date the return is filed if it was delinquent, and ends 10 years later. Several situations 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 of limitations continue to run during any period when the IRS was legally 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 liability, the cancellation of an IRS debt due to the statute of limitations running is not considered income (unlike the cancellation of other debts, such as credit card debt).

If your current financial situation warrants a determination of CNC status, I will pursue negotiations with the IRS (as well as state tax agencies, most of which have a similar status) to get you into that case status. This will allow you to improve your situation without worrying about the IRS enforcing collection.