You owe back taxes and realize the bill is more than you can pay. Perhaps you’ve experienced a job loss, divorce, or other financial hardship. Your tax bill is just one more impossible debt to conquer. Whatever you do, don’t set aside your tax bill and assume it will just “go away.”
Fortunately, the IRS offers an option for cash-strapped taxpayers: the Currently Non-Collectible or CNC designation. This designation can save you from IRS collection activities, such as wage garnishment, bank levies, and asset seizure.
In this case, you’ll need to enlist a licensed tax pro to assist you in filing the paperwork, and in navigating the complexities of IRS policies and procedures.
In the meantime, here is a breakdown of the CNC process and what you can expect moving forward.
Am I Eligible For CNC Status?
In a nutshell, CNC status allows you to set aside your tax bill until your circumstances improve and you’re ready to make payments again. The IRS will also suspend all collection activities.
In order to qualify for CNC status, you’ll need to advise the IRS that you currently can’t pay your tax bill. This is where your tax pro comes in. They’ll file the paperwork on your behalf and interact directly with the IRS representative who will be handling your request.
You’ll need to allow the IRS to get up close and personal as they examine your income, assets, and current expenses to determine whether or not you qualify for the CNC designation. The IRS takes into consideration the following income sources:
- Schedule C income (self-employment/side gig profits)
- Schedule F income (farming business ventures)
- Real estate income(rental properties)
- Other sources of income or investments
If you don’t have any assets you could apply toward the debt (savings account, for example) the IRS will require you to document your average income and expenses. Ideally the IRS would like for you to pay under an installment agreement.
The IRS may require you to complete Form 433. Additionally, they may ask you to provide a full accounting of your income and expenses, complete with receipts and other supporting documentation.
How The CNC Process Works
First and foremost, your tax pro will need to contact the IRS to begin the CNC process. They can also send over your Form 433 along with the supporting documentation. This will set the stage for receiving a preliminary decision much more quickly than if you were to wait for a directive from the IRS.
A word of caution regarding your expenses: the IRS will only acknowledge a portion of those expenses when determining if you’re a candidate for CNC status. Expenses such as out-of-pocket healthcare costs and food, clothing, and miscellaneous items are evaluated against the national average.
Expenses such as housing/utilities and transportation are evaluated against local averages for those costs.
Not A Bulletproof Solution
The CNC designation doesn’t make you bulletproof, however.
The CNC status is temporary. The IRS will monitor and review your tax returns annually to determine if you’re in shape to resume paying your tax bill. In this case, the IRS will request new terms to the previous payment arrangements and you’ll resume paying your taxes.
Interest and penalties will continue to accrue during the CNC period.
The IRS may also take any tax refunds to satisfy your outstanding tax bill.
If you owe more than $10,000, the IRS may file a federal tax lien instead.
Although the CNC program isn’t perfect, it is an option if you’re experiencing undue financial hardship. If your CNC designation reaches 10 years, the IRS will “write off” the tax debt since the statute of limitations on IRS collection activities expires after 10 years.
If you’re facing a sizeable tax bill and are interested in determining whether or not CNC status would be beneficial, we have tax pros on staff who can assist you with this process. They’ll discuss all of your options, and assist you in gathering the needed information and in completing the forms.
Applying for CNC status can be overwhelming during an already stressful time. Our tax pros can help you get started. Contact us today to schedule a consultation.