How to Get Uncollectible Status With the IRS
You may owe the IRS money once you file your taxes for the year. It’s a common predicament for taxpayers, and the IRS offers payment plans and other solutions to help make it easier.
But what if you still can’t afford to pay without severe financial hardship? That’s where IRS uncollectible status comes in. Also known as currently not collectible (CNC), it allows taxpayers to delay payment. The IRS has strict eligibility criteria for this status—and it helps to be aware of the potential drawbacks.
Here’s everything you need to know about CNC status and whether it makes sense for you.
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What is IRS currently not collectible status?
Currently not collectible status means all the following are true:
- You owe the IRS money for taxes.
- You agree with the assessment of your IRS debt.
- You can’t afford to pay it.
CNC status doesn’t make your debt go away. It delays the debt collection until you’re in a better financial position to pay it. The IRS will review your financial situation each year to determine whether you can begin repayment. In some cases, the IRS will make an offer in compromise when it decides you can pay something but not the whole amount. The offer in compromise is a settlement where the IRS forgives some—but not all—of your debt.
In certain situations, the IRS writes off debt in CNC status, but it often takes at least 10 years. If your financial situation remains unchanged, the IRS might write off the debt and no longer try to collect it due to the statute of limitations. The IRS can extend the timeline past 10 years, but it’s unusual.
Who qualifies for noncollectible status with the IRS?
To qualify, you must be able to prove that paying your tax debt would cause financial hardship. You might be eligible for CNC status if you can’t pay your basic living expenses while making payments.
The IRS reviews each situation case by case, considering your income and expenses before deciding. Your finances, including your spending, are under scrutiny. During the review, the IRS may determine you do not qualify for CNC status if you can sell assets, apply for a loan, or pay small amounts from your income over time.
The IRS doesn’t list specific income or debt requirements to qualify for CNC status, but applicants must meet the following criteria:
- You could no longer afford basic living expenses if you paid your tax debt.
- You don’t have assets, such as a car, you can sell to pay your debt.
- You can’t qualify for an adequate loan to pay your debt.
- You must file all your past-due tax returns.
How to request uncollectible status with the IRS
You can request uncollectible status with the IRS by calling the phone number on the top-right corner of your tax notice. If you can’t find the tax notice, call 800-829-1040.
To determine eligibility, the IRS reviews the following documents and forms. The timeline for an IRS decision can vary. But the more you prepare ahead of time, the less time it takes. Here are the forms and documentation you need to apply:
- Copies of your past tax returns
- Completed Form 433-A
- Documentation that proves your financial claims, including pay stubs, bank statements, bills, and loans
David Haas, CFP®, offers the following advice:
If you have income, the IRS will determine whether you have enough income to start paying small amounts toward your tax debt. It might make an offer in compromise, which will reduce your debt. Uncollectible status is reserved for those taxpayers who truly have no assets and minimal income, and collecting the debt will cause harm to the taxpayer. One mistake taxpayers in this situation make is not talking to the IRS frankly about their financial situations.
What happens after you’re granted uncollectible status with the IRS?
Once you get uncollectible status from the IRS, you no longer need to make payments toward your tax debt. The IRS can no longer levy your assets to collect payment. But the IRS will charge interest and penalties during this time, so you can expect your balance to grow.
CNC status does not always last forever. The IRS will review your financial information each year to determine whether you’re still eligible. If your financial situation improves, you might need to repay the balance, including interest and fees.
If you remain in CNC status, the IRS often forgives tax debt after 10 years because of the statute of limitations. It’s uncommon, but IRS can extend the timeline for forgiveness and add extra years.
The following occurrences can trigger the IRS to extend the statute of limitations for your debt:
- You request an Offer in Compromise
- You file for bankruptcy
- You live outside the United States
- You’re deployed in a military combat zone
- You ask for an installment agreement or payment plan
You still must file annual tax returns when you have CNC status. If applicable, you must also make estimated tax payments and federal tax deposits by the due dates. The IRS also has the right to keep your tax refunds and apply the money toward your debt. You’ll get tax bills when you have CNC status but do not need to make payments.
Risks and drawbacks of IRS uncollectible status
Uncollectible status can be a lifeline for taxpayers who can’t afford to pay tax debt. But it’s often a last resort because of the potential drawbacks. Before you apply for CNC, consider the following risks.
- Penalties and interest: The IRS continues to charge penalties and interest fees while your account is in CNC status. Penalty charges can add up. For example, the failure to pay penalty is 0.5% per month, up to 25% total.
- Notice of Federal Tax Lien: The IRS can file a Notice of Federal Tax Lien during CNC status. Creditors and other lenders can view the notice, which can lower your credit rating.
- State Department notification: The IRS is required to notify the State Department about CNC status. It’s at the discretion of the IRS whether Passport Certification receives a notice as well.
- Potential repayment: If your finances improve, you might need to repay your debts in the future. Due to interest and penalty charges, the balance will be higher than before.
Alternatives to getting uncollectible status with the IRS
CNC status is the right choice for certain taxpayers but not everyone. Consider these options if you’re looking for another way to handle your tax debt.
- Offer in compromise: If you have financial hardship, you can often settle your tax debt for less than you owe with an offer in compromise. You still must pay your debt, but it’s smaller. You’ll pay a $205 fee to apply, and eligibility depends on your income, expenses, and other financial factors. Once approved, you can pay your balance as a lump sum or monthly installments.
- Payment plan: Payment plans allow you to pay your balance over time. It might make sense if you can’t pay your balance as a lump sum but can handle smaller monthly payments. Setup fees range from $31 to $205, but low-income earners can qualify for a fee waiver.
- Tax relief company: If you need help navigating the tax system and finding a solution, working with a tax relief company can help. Trained professionals from the company can help you apply for different IRS programs and negotiate on your behalf.
David Haas, CFP®, recommends “…talking to the IRS as soon as you realize you’re unable to pay the full amount of your tax debt. A CPA or other tax professional can help you in your interactions with the IRS and explain your options to you. The biggest mistake is ignoring the situation.”
FAQ
Is noncollectible status permanent?
No, CNC status is not permanent. Once the IRS grants you uncollectible status, it lasts for one year. At the end of each year, the IRS reviews your financial documents to determine whether your financial situation has improved. If it has, you must start repaying your debt. Due to the statute of limitations, this process usually continues for 10 years.
Can I still get penalized while on noncollectible status?
Yes, the IRS continues to charge tax penalties and interest while your account is in CNC status. The penalties can add up and often start at 0.5% per month. If your financial situation improves, you are responsible for paying your original balance, plus penalty and interest charges.
Can the IRS revoke noncollectible status?
Yes, the IRS can revoke noncollectible status if your financial situation improves. Once you have uncollectible status, the IRS conducts an annual review of your finances to determine whether you can afford payments. If your finances improve, your CNC status ends, and you must pay your tax debt.
Does noncollectible status affect my credit score?
The IRS can file a Notice of Federal Tax Lien while your account is noncollectible. Creditors and other lenders can view the notice, and as a result, it can affect your credit rating. It can also affect your ability to sell property or other assets.
Are there any hidden costs or fees with currently not collectible status?
You don’t need to pay to apply for CNC status. However, the IRS will continue to charge interest and penalty fees while your account is in CNC status. If you lose CNC status due to improved finances, you must repay your debt, including interest and fees.
Can you get uncollectible status if you own a home?
The IRS generally will place a lien on your home if you owe money you can’t pay, but you might be able to get uncollectible status even if you own a home. We recommend speaking to a CPA or tax professional—or contacting the IRS directly—for help with your specific situation.
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