IRS Currently Not Collectible Status: What Does It Mean?
While the offer in compromise (OIC) is often sold as the be-all and end-all of tax relief options, there are other strategies that may actually turn out to be more beneficial for a taxpayer than the OIC.
One such solution is IRS currently not collectible status, or CNC.
Although the term may sound confusing at first, it actually means just what it says: A taxpayer in currently not collectible status cannot currently be collected on by the IRS.
This means no wage garnishments, bank levies, or other collection activities the IRS employs to take money from taxpayers who owe.
And there is something really cool about CNC status that in some cases could make it more attractive than an offer in compromise; I’ll tell you what that is later in this article.
Table of Contents
The IRS’ Power to Collect Taxes
Now, to fully appreciate currently not collectible status, one has to understand what it is to be in collectible status with the IRS and how scary that can be.
The IRS is the most powerful collection agency in the country; there is no question about that. The IRS can just straight-up take things from people they think owe money to them, whether or not those people actually do owe money to them.
This is different from other creditors.
How Collections Work With Most Credits
Let’s say a landlord is suing their tenant for back rent.
I’m not even talking about evictions here; let’s say the eviction happened, and the tenant is gone; and now the landlord wants to get the back rent owed to him or her from their former tenant.
They can’t just go start taking stuff from their former tenant and say, “You owe me $2,000 in back rent so I’m going to take your stuff”; the landlord cannot do that; the landlord can’t just go to their former tenant’s employer and say, “Hey, I need you to take money out of my former tenant’s wages and deposit them to me; thank you very much.”
It does not work like that because if that were the case, anybody could do that. The landlord (or in this case, former landlord) needs to go through a legal process involving the court system in which they show evidence that their former tenant occupied their property without paying according to the lease and in that way obtain a judgment against their former tenant.
And once a landlord gets this judgment, they can then garnish their former tenant’s wages, take money out of their bank account through a bank levy, etc. But they still can’t just go and take their car or something like that.
And it’s the same way with most other creditors; a judgment is necessary in order to take actual collection actions.
How Collections Works With the IRS
The IRS does not have to go through any of that. They can simply decide that you owe them money and that they will start taking it from you; but in fairness to the IRS, they do give taxpayers fair notice in the form of various notices submitted to taxpayers when they’re going to start taking things.
I don’t want to make this article all about notices, but usually how it goes with individual taxpayers is first the IRS will send the taxpayer the CP14: Balance Due and Demand for Tax Notice. This is one of the most common notice the IRS sends, and it:
- Informs the taxpayer of the amount of unpaid taxes, penalties, and interest the IRS believes the taxpayer owes
- Requests payment of this amount within 21 days of the date of the notice
Then if the taxpayer has not paid the tax on the CP14 and has not responded to the CP14 within about five weeks, the IRS will typically issue the CP501: Reminder Balance Due Notice With Intent to Levy. Despite it being the second notice that a taxpayer normally receives, it is often referred to as the “first notice.”
It is fairly similar to the CP14 in that it basically tells the taxpayer how much the IRS believes they owe in taxes, penalties, and interest, and gives the taxpayer a deadline to pay this amount.
Then after five weeks, the taxpayer will get a CP503 in their mailbox — referred to as the “second reminder” — that basically says the same thing (“You owe us this much money; pay it by this date”), and then after another five weeks they will get the CP504 in their mailbox.
And if you’re keeping track, you’re correct — there is no longer a CP502.
But this CP504, which is the Urgent Final Balance Due Notice, mentions something that the other notices may not have mentioned. And that is that the IRS intends to levy — or seize — first, the taxpayer’s state tax refund, and second, if the taxpayer’s state tax refund does not satisfy their federal tax debt, other property to apply the value of this property to their federal balance due with the IRS.
The CP504 is the taxpayer’s notice of the IRS’s intent to levy, which is basically the IRS’s term for taking the taxpayer’s things to pay their tax debt.
And then, finally, five weeks after the CP504 notice if the taxpayer has not addressed the issue, the IRS will issue the LT11. This is the taxpayer’s final warning of the IRS’s intent to levy their property, including:
- Wages and other income
- Bank accounts
- Business assets
- Personal assets (including your car and home)
- Alaska Permanent Fund Dividend — that’s the money that the State of Alaska pays every year to every Alaska resident who has lived in the state for a full calendar year
- State tax refund
- Social Security benefits
- And other things!
And if you owe at least $10,000, the IRS may file a Notice of Federal Tax Lien, which is basically a filing in the public record — in the case of real estate, for example, a lien filed at the county recorder’s office — informing creditors and other parties that the IRS has a full or partial right to be paid from the sale of this property to satisfy the owner’s debt to the federal government.
This is a notice of federal tax lien filed in 2009 in Los Angeles County for actor Nicholas Cage. You can see that the government claimed that Mr. Cage had an unpaid balance of six million, seven hundred and twelve thousand, eight hundred and twenty-one dollars and ninety-nine cents. And you can see the language there: “There is a lien in favor of the United States on all property and rights to property belonging to this taxpayer for the amount of these taxes, and additional penalties, interest, and costs that may accrue.”
So when you go to sell your house, for example, this filing makes sure that your title company knows that the government is getting its share of the proceeds before you do.
Now, the lien exists as soon as the IRS assesses the tax and notifies the taxpayer of the assessment — way back at the CP14 — but all the Notice of Federal Tax Lien does is let everybody else know (like the bank when you want to refinance your house) that the IRS has a right to your property.
Now, the IRS will not do these things for at least 30 days from the date of the notice — you can see on this sample notice, the notice date is March 2, but the IRS says they will not start taking things until on or after April 1.
So my point is that, yes, the IRS is a very powerful collection agency; and that also it does give taxpayers fair notice before they start taking things, or at least they give fair notice to the taxpayer’s last known address, which is typically the address on the taxpayer’s last-filed tax return.
But at the end of the day, the IRS wants what’s theirs. And though COVID did push the pause button in many respects on IRS activities, including collection activities, it’s typically only a matter of time before the IRS starts collecting from those it believes owes them unless someone is off the radar, but that is fairly uncommon.
What Is Currently Not Collectible Status?
Now that we’ve talked about the IRS’s power to collect, let’s talk about what exactly IRS currently not collectible status is.
First I’ll show you the IRS’s policy found in Policy Statement 5-71, and then I’ll explain it. Here’s the policy:
- Reporting accounts receivable as currently not collectible—General
- If, after taking all steps in the collection process, it is determined that an account receivable is currently not collectible, it should be so reported in order to remove it from active inventory.
- As a general rule, accounts will be reported as currently not collectible when the taxpayer has no assets or income which are, by law, subject to levy.
- However, if there are limited assets or income but it is determined that levy action would create a hardship, the liability may be reported as currently not collectible. A hardship exists if the levy action prevents the taxpayer from meeting necessary living expenses. In each case a determination must be made as to whether the levy would result in actual hardship, as distinguished from mere inconvenience to the taxpayer.
So IRS currently not collectible status is a status by which the IRS has determined that though a taxpayer does have some assets and income, levying those assets or income would create a hardship for a taxpayer, and therefore it is removed from the IRS’s active inventory of accounts that it will take collection action against.
Believe it or not, the government does believe that a taxpayer’s ability to house, feed, and clothe themselves and the members of their household does take a priority over paying their tax debt. So that’s why we have things like these hardship-based resolution programs with the IRS.
And note that last line: “as distinguished from mere inconvenience to the taxpayer.” Nobody wants to pay taxes; it’s an inconvenience for everybody; but not everybody undergoes hardship as a result of having to pay their taxes, and if you want to get in currently not collectible status, you have to show hardship and not mere inconvenience.
And if a taxpayer is currently having their wages garnished by the IRS, Internal Revenue Code §6343(e) states that the Secretary of the Treasury, and by extension the IRS, which is part of the Treasury Department, must release that levy as soon as practicable, which generally means more or less immediately.
If you are placed in currently not collectible status, the IRS cannot collect from you; they cannot take your things; they cannot garnish your wages; they cannot levy your bank account; they cannot do all those things listed out on the left-hand side of the LT11.
But of course the IRS gets something out of this too; while a taxpayer is in currently not collectible status, penalties and interest accrue on that debt at the same time.
While a taxpayer is in currently not collectible status, the IRS can also file a Notice of Federal Tax Lien on their property because the IRS does not consider doing so to be a collection activity. The theory there is that, well, if you refinanced a piece of real estate and you received hundreds of thousands of dollars on the refi, at that point you would probably be collectible by the IRS and so the IRS will still want its fair share on that refinance unless you can get the lien released or subordinated or dealt with in some other way, but that is a topic for a different day.
Now, I want to go back to a little word in Policy Statement 5-71. And that word is “hardship”; there are other ways to get into currently not collectible status — such as if the IRS cannot locate you — but by and large the most popular way we get our clients in currently not collectible status is by showing that paying the IRS on their tax debt would create a hardship preventing the taxpayer from meeting necessary living expenses.
A Major Benefit of Currently Not Collectible Status
Now, before I discuss how we do this — how we show hardship to the IRS — I want to tell you why in some cases (definitely not all and definitely not most but nevertheless some) getting a taxpayer in currently not collectible status is superior to an accepted offer in compromise.
And the reason is this: While a taxpayer is in currently not collectible status, the IRS’s 10-year statute of limitations on collections continues to run.
Letting the Statute Run
See, the IRS only has 10 years from the date it assesses a tax to collect that tax; there are things called tolling events — such as the pendency period of an offer in compromise plus 30 days, the pendency of a bankruptcy plus six months, a notice of deficiency, a collection due process hearing, etc.
So let’s say for example the IRS was considering an offer in compromise for 11 months. 11 months plus 30 days is about one year. So instead of the IRS’s ability to collect on a tax ending after 10 years in this case, it would end after 11 years because the statute was tolled while the offer in compromise was being considered.
Now, while a taxpayer is in currently not collectible status — even though the IRS cannot collect from that taxpayer to satisfy their tax debt — the IRS’s clock on how long it has to collect keeps ticking.
So let’s say we’re looking at a tax debt from 2014 for a return filed timely in 2015; the tax would likely have been assessed in 2015; this means that the original collections statute date would end some time in 2025, which is 10 years after 2015.
2025 isn’t that far in the future.
So what if instead of submitting an offer in compromise for the taxpayer that could possibly extend the IRS’s collection statute on this debt for let’s say a year until 2026, we instead get the taxpayer in currently not collectible status for the next few years until 2025?
What happens then? The IRS can no longer collect the debt from the taxpayer — including the penalties and interest for that year as well — and the taxpayer hasn’t paid a dime to the IRS.
Compare that to an offer in compromise in which A) the taxpayer will have to pay something to the IRS, namely, their offer amount to compromise their tax debt, and B) submitting that offer in compromise will toll the 10-year collections statute and extend the length of time the IRS has to collect on that debt.
With the currently not collectible strategy, however, the taxpayer has not paid a dime to the government and as long as they can remain in currently not collectible status for the next few years while the collections statute runs out, the IRS is off their back for the debt in question forever.
The IRS and Imminent Statute Expiration
Now, I would be remiss to not mention that the Internal Revenue Manual chapter on currently not collectible status says this:
“Ensuring that the proper action is taken on an account before the collection statute expires is a priority. The actions required to resolve short statute issues will depend on the circumstances.”
So the IRS is not naive here, and I don’t want to imply here that running the collections statute out via CNC status is some sneaky move to pull one on the IRS; they will be aware of the situation.
And in fact if the statute expiration is “imminent,” meaning within the next twelve months, then the Internal Revenue Manual states that “the revenue officer must discuss [the case] with their group manager and document an appropriate plan of action to resolve the [it] prior to the expiration of the statute.”
But if the facts are the facts, and the numbers we present to them are the numbers we present to them, and by their own rules, the IRS cannot collect on a taxpayer because they qualify for currently not collectible status, and the taxpayer continues to qualify for currently not collectible status until the statute of limitations on collections expires, then the IRS has to follow its own guidelines.
The “Karen” Technique
And sometimes, especially if your strategy is to run the statute out, you may face confrontational employees at the IRS who will do everything in their power to make your life difficult.
This is not the norm, particularly when working with experienced IRS employees, but there are bad apples in every organization.
But if this happens, you have to pull what I call the Karen Technique, and that is simply this: Ask for their group manager’s name, fax number, phone number, email, and ID number.
You will find in dealing with the IRS that it is an incredibly bureaucratic and hierarchical organization, and that group managers have a lot of power.
And if despite you clearly being able to show based on the financial analysis using the IRS’s own forms that I’ll touch on later in this article that you cannot reasonably be expected to cover your basic living expenses and simultaneously pay the IRS at the same time, the IRS employee to whom you’re speaking does not see it that way, take it up the chain. And even just asking for the manager’s information may produce a more agreeable lower-level IRS employee. And placement in currently not collectible status typically requires manager approval anyway.
So bottom line: Don’t just rush into an offer in compromise; many times the offer in compromise is the clear and best way forward; but also consider all options, including currently not collectible status.
Now, I will probably write an article in the future on currently not collectible vs. offer in compromise, but suffice it to say that in most taxpayers’ circumstances, both options should be considered.
That’s why at Choice Tax Relief we start with an investigation of our clients’ options and don’t just rush into an offer in compromise with the IRS.
And sometimes currently not collectible status can be used toward something of a blended tax resolution approach in which, perhaps, a taxpayer has tax debt across a number of years ranging from eight years ago to last year.
And maybe the older tax debt was relatively larger and has accrued large balance of penalties and interest as well, so maybe the strategy is to get the taxpayer in currently not collectible status until the older tax debt, penalties, and interest fall off in the relatively short term and then if the newer tax debt is smaller, maybe the taxpayer has no problem just dealing with that with an affordable installment agreement rather than going for an offer in compromise now on the whole debt, which can be challenging especially if the taxpayer has equity in assets.
On the flip side, particularly when the taxpayer doesn’t have equity in assets, sometimes it’s better to just submit an offer for this huge tax debt including all years including the older years because optically this huge tax debt compared to the taxpayer’s ability to pay based on the financial analysis on the Form 433-A (OIC) may just look insurmountable.
So you definitely have to know how the IRS thinks about these things and not just about the numbers sometimes but also potentially the optics as well.
Passport Certification and Decertification
One more thing I want to mention before getting into the mechanics of getting into currently not collectible status is that currently not collectible status can be used to reinstate a taxpayer’s passport if their passport has been revoked or denied.
Internal Revenue Code Section §7345 plainly states that if a taxpayer has “seriously delinquent tax debt” — which is defined as an assessed tax greater than $50,000 that is in collections — then the IRS will let the State Department know about this, and the State Department then has the right to deny, revoke, or limit a taxpayer’s passport.
So that can be a big deal, and we often get inquiries from individuals who are out of the country who have large federal tax debts, and they’re freaking out about the passport issue because passports expire every 10 years, and if the IRS has certified their tax debt to the State Department, they may not be able to get their passport renewed.
But check this out from the Internal Revenue Manual:
“The IRS has exercised discretion to exclude debts that are currently not collectible due to hardship. The IRS will reverse the certification of seriously delinquent tax debt and notify the State Department within 30 days if a certified taxpayer is later determined to be currently not collectible due to hardship.”
So this is basically saying that if a taxpayer who has passport troubles due to their more than $50,000 in tax debt gets in currently not collectible status then these passport issues can be dealt with by getting in currently not collectible status.
How to Get in Currently Not Collectible Status
So obviously currently not collectible status can be quite enviable for a taxpayer. It gets the IRS off their back, at least temporarily, and it can possibly be used to run the IRS’s collection statute out, getting the IRS off their back forever at least with respect to that particular debt.
So how do you get into currently not collectible status?
IRS CNC Codes
Well, there are a few different reasons that the IRS might consider a taxpayer’s account not collectible, and we can see a pretty good population of these reasons in the IRS’s currently not collectible closing codes table in Internal Revenue Manual 188.8.131.52.
|03||Inability to locate the taxpayer or assets|
|04||Partial expiration of the assessment prior to issuance|
|05||Complete expiration of the statutory period for collection or suit initiated to reduce tax claim to judgment|
|06||For use by revenue officers on international casework, where a taxpayer can pay but the IRS is unable to collect a liability because the taxpayer resides in a foreign country|
|07||A corporation, exempt organization, or limited liability company (LLC), where the LLC is identified as the liable taxpayer, liquidated in bankruptcy|
|08||Death of an individual with no collection potential from the decedent/decedent estate|
|09||Accounts below tolerance|
|10||Corporations, certain limited liability partnerships (LLP), exempt organizations, or LLCs, where the LLC is identified as the liable taxpayer, which are inactive and defunct with no assets|
|12||Inability to contact a taxpayer although the address is known and there is no means to enforce collection|
|13||A corporation, exempt organization, limited liability partnership (LLP), or LLC, where the LLC is identified as the liable taxpayer, remains in business and is current but is unable to pay back taxes|
|14||When suspending collection of BMF balance due accounts when the key individual is deployed to a combat zone; see IRM 184.108.40.206.1, Business Masterfile (BMF) Accounts of Taxpayers Deployed to a Combat Zone, for additional information|
|15||Obsolete — this was formerly used for corporate income tax liabilities owed by a financial institution certified as insolvent by the Office of the Controller of the Currency or the Office of Thrift Supervision|
|17||Inability to locate the single member owner (SMO) or assets of the SMO who is liable for taxes assessed under an LLC employer identification number (EIN)|
|18||Inability to contact a single member owner (SMO) who is liable for taxes assessed under an LLC EIN when the SMO address is known, and there are no means to enforce collection|
|19||Accounts below tolerance that are assessed under an LLC EIN, but owed by SMO; see IRM 220.127.116.11.5, Tolerance, for additional information|
|24-32||Collection of the liability would create a hardship for taxpayers by leaving them unable to meet necessary living expenses|
|35||For use only when recessing standalone individual shared responsibility payment (SRP) modules or the mirrored SRP module (MFT 35/65)|
So you can see that there are a variety of reasons why the IRS may place an account in currently not collectible status ranging from the inability to locate the taxpayer to the death of the taxpayer with no collection potential from their estate to various codes for business accounts, but for our purposes, the most common way that everyday living taxpayers get placed in currently not collectible status is by showing hardship, namely, that the “collection of the liability would create a hardship for [the] taxpayer…by leaving them unable to meet necessary living expenses.”
Now, I want to draw your attention to the fact that there are nine different codes for hardship, ranging from 24 to 32. Why is this?
Well, if you go to the very end of this particular section of the Internal Revenue Manual to Exhibit 5.16.1-2, you will see a table that shows you the values for the hardship closing codes.
What do these mean?
These are dollar amounts that an IRS employee inputs into their system whenever somebody is placed in currently not collectible status due to hardship.
And what each of these codes means is that when a taxpayer’s income reported on a future tax return meets or exceeds the amount indicated by the code that was input for them, the IRS will take them out of currently not collectible status.
As you can see, these amounts are in $8,000 increments.
So what determines which code a taxpayer placed in currently not collectible status will be assigned? Well, the Internal Revenue Manual plainly instructs their employees to do as follows:
Use the hardship closing code that most closely corresponds to the taxpayer’s total living expenses allowed…Select the hardship closing code with the closest dollar amount above the annual living expense amount.
Form 433-A and Form 433-F
Which form you use generally depends on whom you’re speaking to. If you’re not in collections yet or you’re in Automated Collections, then Form 433-F may suffice. But if the IRS has assigned a revenue officer to your case, that individual will probably want the more extensive Form 433-A.
Just as a matter of practice, for our clients no matter where they are in the collections process, we typically just do a Form 433-A because it covers the 433-F and then some.
If you’ve received a notice from the IRS, there is typically a phone number on it for you to call, but if you don’t open those collection notices from the IRS, you can try the IRS’s Automated Collection System phone number for wage and income taxpayers, which is 1-800-829-7650.
And regardless of which form you use, the Form 433-A or Form 433-F, it’s not like you can just put all of your expenses on these forms; the IRS has specific rules for what expenses you can and cannot include on these forms; it has specific maximums for certain expenses; but it also gives you certain expenses whether you pay for them or not.
I’m not going to go through all that math here. A lot of the guidelines on how to do the math can be found in Internal Revenue Manual Chapter 15, Section 1, Financial Analysis Handbook. It’s not exactly light reading.
I have covered some of how the IRS approaches the analysis of a taxpayer’s financial situation in my offer in compromise formula article where I go through a lot of the math and how to value things for purposes of an offer in compromise, which is a bit more difficult in some circumstances to obtain than currently not collectible status particularly if a taxpayer has equity in assets so some of the math may be different, but reading that article will give you a taste for some of the complexities required here in order to fill out these forms in a way that’s both accurate and also as favorable to the taxpayer as possible.
But essentially what these forms are are collection information statements that give the IRS a picture of your personal and financial situation in terms of income, expenses, and assets.
On the topic of assets, you can have equity in assets and still qualify for currently not collectible status; it is generally easier for those with equity in assets to qualify for currently not collectible status than it is for them to qualify for an offer in compromise.
However, the Internal Revenue Manual is very clear that if the taxpayer does have equity in assets — such as equity in a home — there must a reason why the taxpayer is still being placed in not collectible status. A good reason for currently not collectible purposes is that the taxpayer cannot qualify to take cash out of their home through a refinance; so oftentimes we will have a client apply for a refinance and get rejected and we will submit the denial letter to the IRS so they can check their box that equity in assets has been addressed.
So the bottom line is that it’s on the basis of this Form 433-A or Form 433-F, along with supporting documentation, that the IRS determines whether or not a taxpayer will qualify for currently not collectible status based on hardship.
Note that there are some limited exceptions in which the IRS will not require a Form 433-A or Form 433-F to be submitted, but theses cases generally require the taxpayer to owe them a very small amount of money and either be:
- Terminally ill
- Facing excessive medical bills
- Having only Social Security, welfare, or unemployment as their income
Removal From Currently Not Collectible Status
So let’s say that you get approved for currently not collectible status based on hardship, and you used Form 433-A. The hardship code that will be used in your file with the IRS is the one that is closest to and greater than Line 49 of your Form 433-A times twelve plus $300 because the Internal Revenue Manual states:
If the closest closing code amount is only $300 more than the annual living expense amount, the next higher closing code would be selected. The history would be documented that an increase in Total Positive Income (TPI) of only $300 above total living expenses allowed annually would not enable the taxpayer to make monthly payments.
So let’s say your total living expenses are $6,000 a month based on the Form 433-A and the IRS’s own Internal Revenue Manual. $6,000 a month times 12 is $72,000 for the year. So the IRS would use Closing Code 31 for your situation because at $76,000 that’s the next highest one and $72,000 is more than $300 away from $76,000.
So if next year you file a tax return that indicates that your income is $76,000 or more, the IRS will take you out of currently not collectible status.
Now, that doesn’t mean the game is over. Sure, you may be making more money, but what if you also have more expenses? What if one of your children or your spouse or you got very, very sick? What if you had another child? What if there’s some other circumstances that transpired between last year and this year that, along with your increase in come, also led to you having to pay more for basic living expenses for yourself and your household?
So if you are removed from currently not collectible status, you can certainly be placed back in it if you can show hardship again at your new income level. It will likely require you to complete another Form 433-A or Form 433-F as the case may be.
And even beyond the filing of tax returns, the IRS may simply just reach out to the taxpayer periodically and request updated financial information pertaining to their collectibility status.
If you’d like a professional in your corner to help you deal with your tax issues, feel free to reach out to us over at Choice Tax Relief.