In addition to the somewhat misleading television and radio commercials claiming to settle IRS tax debts for pennies on the dollar (click here for more), there is a new wave of information regarding “Currently Not Collectible” status or “CNC”. The commercials inform the listener that if they cannot afford to pay the IRS anything they can obtain CNC status and the IRS immediately has to cease all collection activity. This is true, but there is more to it than simply telling the IRS to back off because you don’t have any money.
In order to gain CNC status you have to provide the IRS a personal financial statement. The financial statement will review income and expenses, all of which you may be asked to document. Also, for some expenses, such as food, clothing, housing, vehicle, the IRS has standard amounts which they allow. If you are above these amounts the IRS will not consider this added expense and will instead ask that you change your lifestyle to be more in line with the set standards. Furthermore, the IRS likely will not consider expenses they do not deem necessary such as credit card payments or personal hobbies and activities. Assuming you get to the point where you and the IRS agree on a personal financial statement and that you cannot make payments, it is still not over. CNC status is considered temporary and the IRS will very likely ask you to update your situation in the future to prove you still cannot afford to pay. If your job status changes, you inherit money or you have an expense that is no longer required, it is possible your financial statement could look much different than before. If so, you may now have to pay on a debt that has been accumulating interest during the period you were in CNC status. This is one more detail often lost in the fine print: interest continues to accumulate while you are in CNC status . The debt does not pause or go away, it continues to sit there and grow, waiting for you. The only possible conclusion that might get you out of the debt is if you are able to prove CNC status for long enough that the IRS’s collection period of 10 years expires. In reality, generally the closer it gets to this date the more the IRS will scrutinize your personal financial statement and look for assets you have to pay them back. This is why in practice CNC status should be looked at more as a bandage than a cure.
If you owe money to the IRS and have questions regarding your options contact us today at Hone Maxwell LLP. We can give you a complete overview of your case including the risks, benefits, and also the possible long term consequences of the decisions you make today. For more tax updates and the latest news you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP.