Currently Not Collectible Status (CNC)

Written By Attorney Michelle Wynn on 2/28/17
For Individuals

Currently Not Collectible Status (often referred to as CNC status or Hardship status) for individuals is the only option for resolving an IRS debt without making any payments at all towards the liability if you agree that the liability the IRS is trying to collect is correct and that you owe it. However, it is only available if you can prove to the IRS that you genuinely cannot afford to pay anything towards your tax liability.

In order to get the IRS to place you into Currently Not Collectible status, you must prove to the IRS that based on your income and the amount of your reasonable and necessary living expenses, you cannot afford to pay anything towards your tax liability. While this is often possible for low-income taxpayers, especially those who are unemployed or are living on modest social security income, I have represented taxpayers making more than $250,000 per year that were granted CNC status. However, for people with higher incomes, the IRS often wants to strongly question, and see proof of, very large monthly expenses for absolute necessities (minimal mortgage, high out of pocket health care expenses, high medically-required specialized diet expenses, etc.) to show that you truly cannot afford to make any payments towards your tax liability at this time.

While Currently Not Collectible status is considered a temporary status, for people on fixed incomes or on consistently low incomes it can actually serve as a permanent status to allow their tax liabilities to expire without making any payments to the IRS. When a person is in CNC status, the IRS has computer programs that compare the person’s filed tax return each year to the financial information they provided when they first were granted CNC status. If the income has increased by more than a certain percentage (the IRS will not release this percentage), the IRS will send a letter requesting updated financial information. Sometimes, the IRS simply sends a letter indicating that the person is removed from CNC status and leaves it to the person to call in again and provide updated financial information. Sometimes, even when the person has not filed returns indicating increased income amounts, the IRS can send a letter requesting updated financial information showing the person still qualifies for CNC status.

While you are in Currently Not Collectible Status, your liability will continue to exist until it expires (referred to as the CSED, the Collection Statute Expiration Date). Generally, a liability expires (i.e. the IRS can no longer collect on it) 10 years after the liability was assessed (generally, when the tax return was filed), but there are certain actions that can stop this clock from running or can add additional time for the IRS to collect. While the liability exists, it will continue to accrue interest and late payment penalties. If no tax lien has been filed against you yet, typically the IRS will file one when you are granted CNC status. If you are due any income tax refunds while you are in CNC status, the IRS will take these and apply them to your liability.




For Businesses

For businesses, the first question is whether it is wise to request Currently Not Collectible Status. Currently Not Collectible Status for a business that is still in operation is advisable only in rare cases. Typically, if a business cannot afford to pay its current operating expenses and cannot afford to pay anything towards its back taxes the business is viewed as no longer being viable and the IRS Revenue Officer assigned to the case is encouraged to start enforced collection efforts (i.e. levies/garnishments on bank accounts, accounts receivable, assets, etc.) to attempt to collect something on the back taxes before the business goes under. However, if the operating business has no ability to pay towards the liability and does not have any assets the IRS can seize, then it might be reasonable to request an in-business CNC status.

If the in-business Currently Not Collectible Status is granted or is likely to be granted, the Revenue Officer will take great pains to ensure that the business is in full filing and payment compliance for its current taxes and that any owners of the business are also in full filing and payment compliance for their personal taxes. Once in-business CNC status is granted, the Revenue Officer is supposed to follow up within 18 to 24 months to determine if the business is still operating, is still in compliance, and if it is still eligible for CNC status.

Currently Not Collectible Status is more often granted to businesses after they have gone out of business. For a business that went under and had no assets remaining to pay towards the liability, the IRS can close out the liability as out-of-business Currently Not Collectible status.

The IRS does not simply write off the liability, at least not until the liability expires, in case the business opens again. Sometimes people will close one business and immediately open a substantially similar business under a new name and the IRS has tools it can use to determine if it can hold the new business responsible for the old business’s tax debt. Sometimes people will close their business for a year or two and then re-open it. In those cases, the IRS does not want to lose out on its chance to collect the taxes owed and that is why it does not simply write off the liability. If you are considering closing a business with a tax debt and you may want to re-open the business (or a similar business) in a year or two, there might be better ways of resolving the liability, such as with an Offer in Compromise.





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