There are several options to consider when one has a tax balance owed to the IRS. One can seek an Offer In Compromise; one could utilize Installment Plan options, or most likely as a last resort, to declare a form of bankruptcy. In these options, the tax debt is reduced. However, there is an option that does not reduce the tax debt but provides relief. This option comes when one applies for Currently Not Collectible (“CNC”) – based on a hardship status.
When you cannot afford to pay both your tax debts and your basic living expenses, you may be eligible for what qualifies under the IRS CNC status. If the IRS grants you this status, the IRS will refrain from all collection activities of tax debt, including refraining from garnishing, levying, or placing liens on your property. Once it is established that you can meet your living expenses and pay your tax debts, the IRS will then pursue/resume its collections activities. During this time, they will not solicit payments from you, garnish your wages, or place liens on your property. The IRS will, however, continue to apply penalties and interest to your tax debt. In addition, while there is a balance owed, any future tax refunds will be applied toward this tax debt.
There are a couple of requirements to be considered by the IRS for CNC status. First, you will have to complete a financial analysis to show your financial difficulties to the IRS. A tax attorney, especially with a CPA background, could come in handy to help appropriately portray your financial position. Second, you need to file any delinquent or missing tax returns. Going forward, the IRS will use the future filed returns to evaluate your financial condition for continued CNC status.
The primary purpose of CNC status is to help people deal with financial hardship and not force them into having to use bankruptcy as the only way out. If one needs to use this status, there is no shame to it since it’s meant to be a stop-gap to help people dealing with severe financial needs get back on solid footing. However, it should not be used as a loophole to avoid paying taxes, nor is it for those living well off.