When you are in an IRS currently not collectible status (CNC status) you are protected from IRS collection enforcement. The IRS can’t levy or garnish and other than possibly filing a notice of tax lien, it leaves you alone.
This sounds great, but in order to be placed in this status you have to convince the IRS that paying would be a real financial hardship. For some people this is difficult to do. Despite this, the U.S. Treasury Inspector General consistently reports that a few million people are in this status at any given time.
Many of our clients use CNC status in combination with the IRS’ statute of limitation on collection to get rid of the debt entirely. An example:
Mr. Smith owes the IRS $100,000.00 and is now facing IRS enforced collection. 6 years of the IRS’ 10 year statute on collection have passed and Mr. Smith has 4 years remaining until the statute removes the debt permanently. He is retired and living on social security and a small pension. The IRS agrees that he qualifies for currently not collectible status and discontinues collection activity. Other than receiving reminders from the IRS about the debt amount, the IRS makes no attempt to collect for 4 years and Mr. Smith’s debt is wiped away.
Sounds great of course, but the IRS also removes people from currently non collectible status on a regular basis for the following reasons:
1. Failure to file and pay all future taxes
The most common reason we see for people being removed from this status is the failure to file a subsequent tax return and/or the failure to pay subsequent taxes when they come due. Nothing will get you booted sooner because the IRS system can easily ascertain when a return is late or a payment is late.
2. Increase in Income
When you file a tax return the IRS can see whether your income situation has improved and will often as for an updated set of financials to determine whether your can afford making a payment. When it sees the financials and a new ability to pay, you will be removed and a payment plan will have to be negotiated.
3. Formal Review
The IRS will often mark your file for a formal review when it agrees to place you on CNC Status. Every few years the system will issue a request for updated financial information from you. The revenue officer or collections will do this when they believe that your income may go up in the future.
4. Right to Review at any time
In the end, the IRS has the ability to review CNC status for any reason at all. If you have several years remaining on your 10 year statute period, you will want to look at other long term options like an IRS offer in compromise or bankruptcy in order to avoid this.