Don't Bet the Business

While there are many resolution options for taxpayers who would like to pay their outstanding income tax liabilities, sometimes there simply aren’t enough assets or income  available to allow for a more permanent or long-term resolution. 

Many taxpayers have limited assets or disposable income after paying monthly expenses to permit making even a small payment to the IRS.  However, that reality will not end IRS’s calls and notices or the personal sense of hopelessness an unresolvable tax debt creates. What can a taxpayer do to make a good faith effort to address their outstanding tax balance under these circumstances?

Fortunately, there is an option: Currently Not Collectable (CNC) status. The CNC status is intended for the taxpayer without sufficient liquidity or disposable income to cover their IRS allowable living expenses much less make monthly payments to the IRS.

When the IRS places a taxpayer’s account into CNC status, it means that the IRS will not take any collection or enforcement actions while the status remains in effect.  Being placed into CNC status does not resolve the tax debt. Instead, the IRS forebears any collection actions while the 10-year collection statute continues to run.

While CNC status offers a temporary collection delay,  there are still negative consequences for the taxpayer. During this collection forbearance period, penalties and interest continue to accrue. These are added to the tax balance which become part of the tax debt if the CNC status is ever removed.

During CNC status, the IRS will also file all statutorily required federal tax liens against any assets that the taxpayer owns or acquires. These liens also become enforceable if the CNC status is removed. The filing of federal tax liens is done to preserve the ability of the IRS to collect in the future if the financial health of the taxpayer improves to the point that CNC status is no longer applicable and payments can resume.  

To determine  whether to continue CNC status, the IRS will flag the taxpayer’s account at the time of the status change. As the taxpayer files their annual income tax return each year, the reported income is reviewed by the IRS’s automated system. When the most recently reviewed tax return shows income above a certain threshold, it will trigger the IRS to review the CNC status to determine if the status is still appropriate.

During the review, the IRS may require updated financial information from the taxpayer or simply remove the CNC status. Should the IRS remove CNC status, normal enforced collection will resume.  The threshold for removal of CNC status is different for every taxpayer and remains the same for the duration that CNC remains in effect.

If CNC status does not resolve the outstanding tax debt, why does it make sense to pursue it as a collection alternative?

Put simply, CNC status buys time. In this way, it can be an effective resolution option for the following situations:

• The 10-year collection statue is expiring soon. Remember that the statute continues to run while the taxpayer is in CNC. Placing a taxpayer in CNC will allow the remaining time to run out and prevent the IRS from taking further enforcement action.
• The taxpayer recently sold or transferred assets and this transfer makes them ineligible for an Offer-in-Compromise (OIC). Assets remain collectible by the IRS for three years from the date that they are sold or transferred. When assets are transferred during this three-year period, the IRS will include them in the taxpayer’s financial disclosure calculations when determining which assets are available to satisfy a tax debt. This inclusion can cause a taxpayer to be ineligible for an OIC. By securing CNC status, the taxpayer is given the necessary time for the assets to reach the three-year exclusion mark so that they can file for an OIC.
• The taxpayer has compliance problems that will take time to correct. These compliance problems may involve unfiled tax returns or unpaid current taxes.  The IRS will not consider a collection alternative until a taxpayer is both payment and filing compliant. By securing CNC status, the taxpayer is given the necessary time to prepare and file any missing returns and make any required current tax payments without fear that the IRS will levy their bank accounts or wages.

These are examples of circumstances where CNC status is an effective tool available to taxpayers to buy the time needed address their tax liability.  It is not an exhaustive list, and there are other scenarios where a CNC may be an effective strategy for addressing tax issues. CNC can be used to prevent the IRS from taking enforced collection action for a certain period. And that might be exactly what the taxpayer needs to set themselves up for a more permanent solution to their tax issues in the future.

If you would like to pursue CNC status, your tax attorney should be able to help.