IRS Hardship Program: Currently Not Collectible Status for Back Taxes

Can't afford to pay back taxes? If you prove you're unable to pay, the IRS will mark your account as uncollectible and stop all collection actions against you. This article explains how to apply for currently not collectible status and what to expect when your account is in CNC status (aka status 52).

Key takeaways

• Stopping collection actions - Currently not collectible status stops all collection actions against you until your financial situation improves.
• Possible debt expiration - If the debt expires while you're on CNC status, you won't have to pay back those taxes.
• No set CNC application - There is no formal application for CNC, but you will need to file a financial disclosure.
• Supporting documentation - You must include documents to support the claims made on your collection information statement.
• Phone or in-person - Most people apply for CNC by working with an IRS employee over the phone or in person.
• Federal tax liens - The IRS will generally issue a federal tax lien while you're in CNC status.
• No tax refunds - The IRS will also seize any tax refunds you earn while your account is marked as CNC.

What is Currently Not Collectible (CNC) Status?

CNC status is when the IRS stops collection activities on a tax debt because the taxpayer is unable to pay. According to the Internal Revenue Code (IRC) 5.16.1.2.9, "Hardship exists if a taxpayer is unable to pay reasonable basic living expenses." 

Taxpayers must file a collection information statement to prove that they have insufficient income and no equity in their assets to pay their back taxes. If your financial situation improves, the IRS may remove this status from your account. 

Short-Term Payment Extension

If you cannot afford to pay taxes on a return that you are getting ready to file or on a new tax assessment, you may be able to get a short-term payment extension. To apply, you must file Form 1127 by the return's due date or the deadline on the deficiency notice, and you must provide a lot of details about why you cannot pay.

The IRS will give you up to six months to pay if you qualify and up to 12 months in exceptional situations. During this time, penalties will not accrue on your account. A short-term payment extension is not the same as CNC status. It's a very temporary situation for people with new tax debt who need six to 12 months of extra time. 

Eligibility for the CNC Tax Program

You can only get CNC status on federal taxes due to individuals, couples, sole proprietors, LLCs where an individual owner is liable, and partnerships where a general partner is liable for the taxes. The IRS may also close restitution cases due to CNC, if applicable. However, if you're dealing with corporate income tax, payroll tax, or other business taxes, you generally will not be able to get your account marked as uncollectible. 

The main requirement for CNC status is that you prove your inability to pay. Generally, that means you have no income or low income and very limited assets or equity that you cannot access, and you must prove that to the IRS by submitting detailed financial information. 

However, if any of the following apply, you may be able to get CNC status without filing a collection information statement:

• You have a terminal illness or excessive medical bills.
• You're incarcerated.
• Your only source of income is Social Security, welfare, or unemployment.
• You're unemployed with no source of income. 

Check out TaxCure's guide to requirements for CNC hardship status to learn more.

How to Apply for CNC Status

There is no set application for IRS uncollectible status. You just need to contact the IRS, ask for CNC status, and provide a collection information statement. You can often use Form 433-F as your collection information statement, but if your account has been assigned to a revenue officer, you will need to complete Form 433-A instead.

Form 433-A is slightly more detailed than 433-F, but they request about the same information. Be prepared to note all of your income sources, your monthly bills, your assets, and your debts. Generally, you apply for CNC status by calling the IRS with this information or meeting a revenue officer in person, but you may need to mail in these forms with supporting documents.

Tips for a Successful Application

Here are some tips to help as you apply for CNC status:

• Disclose all assets including assets transferred in the last 10 years - lying about assets on IRS forms is tax fraud.
• Value assets carefully - If you undervalue assets, the IRS may argue that you need to use higher values, but if you use values that are too high, you may not qualify for CNC status.
• Make sure expenses are below the IRS's financial standards - The IRS has set standard amounts for housing, utilities, transportation, etc based on your location.
• Be ready to substantiate extra expenses - The IRS will generally not consider extra expenses unless you can prove that they are necessary (for example, higher electric bills to run medical equipment in your home).
• Work with a tax professional - A tax professional can help you fill out the collection information statement and deal with the IRS. 

Check out this guide to applying for CNC hardship to learn more tips and tricks.

What Happens After You Apply?

The review process can take months, and once you submit the paperwork, the IRS may request more information. If you owe a relatively small balance, the agency may process your application faster than if you owe a significant amount. If your balance due is over a certain threshold (which is not published on the IRS website), the IRS may also do the following while reviewing your account:

• Review returns submitted in the last two years for indication of assets.
• Do a public records search for assets you own.
• Verify income reported on your collection information statement.
• Search for motor vehicle records in your state.
• Check courthouse records for real or personal property ownership.
• Request a Foreign Account Tax Compliance Act (FATCA) if you've previously filed Form 8938 to report foreign assets.
• Obtain research for FinCen if you have filed an FBAR for foreign bank accounts in the past.
• Pull a full credit report.

Depending on how much you owe, the IRS may only do some of the above checks. The agency will also look into more details if you're currently being audited or if your account was under Criminal Investigation.

If the IRS denies your application for CNC status, they may demand that you pay the tax debt in full, but more commonly, the agency will allow you to set up a payment plan. If you cannot afford to pay the minimum monthly amount on a standard payment plan, the agency may let you do a partial payment installment agreement where you make payments until the debt expires, and then, you don't have to pay any of the remaining balance.

What to Expect While You're on CNC Status

While you're on CNC status, you don't have to pay anything, but interest and penalties will continue to accrue on your account. The IRS will stop all collection actions such as wage garnishments and asset seizures, but a federal tax lien may continue to exist on your assets. 

You can often get CNC status even if you have equity in your home, but for that to happen, you may need to prove to the IRS that you cannot access the equity. Then, if you sell or refinance the home while you're still on CNC status, the IRS will have a claim to some or all of the funds based on the value of the federal tax lien.

Typically, the IRS monitors your financial situation through your tax returns. If you file a tax return indicating that your income has risen above a certain level, the agency will remove your account from CNC status and demand that you pay in full or set up payments.

The IRS has the right to keep tax refunds that you earn while on CNC status. To avoid that, try to not file tax returns that show a refund. If you're employed, fill out your W4 carefully so that your employer only withholds the exact amount you need to pay — use the multiple jobs worksheet to ensure you're taking into account all of your and your spouse's income (if applicable). If you're self-employed and your income varies, fill out the 1040-ES every quarter to ensure you're not paying more than needed.

Currently Not Collectible Statute of Limitations

If the tax debt expires while you are on CNC status, you will not need to repay it. IRS tax debt has a collection statute expiration date that is 10 years after the tax assessment but often ends up being a bit longer because the timeline pauses when you apply for certain programs or appeal certain actions. 

Here's an example. Imagine that you owe $20,000 in tax debt, and it expires on April 15, 2030. In 2024, you get the IRS to mark your account as currently not collectible, and over the next six years, your financial situation doesn't improve. On the expiration date in 2023, your debt expires, and you no longer owe it. 

Alternatives to CNC Status

Currently not collectible status may be the best option if you cannot afford to pay anything, but it is not the only option for taxpayers with limited income and assets. Alternatively, you may want to consider the following programs:

• Offer in compromise - The IRS settles your debt for less than you owe. You can pay the settlement in a lump sum or over 24 months. The main advantage is that you only lose your tax refund in the year you apply. With CNC, the IRS takes your refunds until you are off the program.
• Installment agreement - You make monthly payments until you pay off the tax debt. As long as you can afford to pay off the full debt by the expiration date and you meet other qualifications, you don't have to file a collection information statement, making the application process easier than a CNC.
• Partial payment installment agreement - You make monthly agreements based on your collection information statement, and at the end of the payment plan, any remaining balance due expires. This is similar to a CNC, except that you must make small monthly payments. 

A tax professional can help you decide on the best option for your situation. They can also help you look into options such as penalty abatement, bankruptcy, or others.

Common Challenges and Misconceptions

Here are some misconceptions about the IRS currently-not-collectible status and the truth behind them.

1. Myth: You don't have to pay anything - Truth: If your financial situation improves, you will have to resume payments. The IRS monitors your income by the tax returns you file.
2. Myth: Your tax debt stops growing - Truth: Interest will continue to accrue on your account until the expiration date. The failure-to-pay penalty will apply until it reaches 25%.
3. Myth: You get to keep your tax refunds - Truth: If your tax return shows a refund while you are on CNC status, the IRS will keep it.
4. Myth: CNC status doesn't stop active collection actions - Truth: If there is a wage garnishment, bank levy, or other active collection action, it will stop when you get on CNC status.
5. Myth: The IRS will keep contacting you - Truth: Once you secure CNC status, the IRS will only reach out if your tax return shows income over a certain level or the agency gets some other alert that your finances have improved.
6. Myth: Tax liens will be released - Truth: Although other collection actions will stop, all federal tax liens will continue to exist until the tax debt expires.
7. Myth: You don't have to pay any tax while on CNC status - Truth: This status affects your back taxes. You must pay any new taxes you incur, including business and estimated quarterly taxes.

When you work with a tax pro, they can help you understand the exact implications of this hardship program and what it means for your unique situation. 

Professional Assistance and Resources

If you have very limited income and assets, you may be able to contact the IRS and apply for CNC status on your own. However, if you have a slightly more complicated situation or if you just want to get help through the process, you should reach out to a tax professional. A pro can also be invaluable if you're currently dealing with wage garnishment or other collection actions.

Here are some government resources to help as you decide how to approach this process:

• Taxpayer Advocate Service resource on currently not collectible
• IRS - Temporarily Delay the Collection Process
• Internal Revenue Manual (IRM) Hardship Status
• Form 433-A Collection Information Statement
• Form 433-F Collection Information Statement

If your income is below 250% of the poverty line, you may also qualify to get help from a Low-Income Taxpayer Clinic. There are LITCs all over the country - check out this resource to find the closest location to you.

FAQs About IRS CNC Hardship Status 53

What is the difference between CNC status and an Offer in Compromise?

With CNC status, you pay nothing, and the IRS stops collection actions against you. Your debt remains due, but you will only be required to pay it if your income increases over a certain threshold. 

With an offer in compromise, you pay a portion of the taxes based on your income and assets. Then, the IRS waives the remaining debt. If your income improves, you will not be required to repay the settled amount. You will only be held responsible for the settled amount if you fail to meet the terms of your agreement - for example, you incur new tax debt that you can't pay.

How long does it take to get CNC status approved by the IRS?

The IRS may take several months to approve CNC status.

Can the IRS revoke my CNC status?

Yes, CNC status is temporary. The IRS can revoke it if you file a tax return showing income over a certain level or if the agency gets other information indicating that you are able to pay.

Will I still accrue interest and penalties while in CNC status?

CNC status does not stop interest or penalties. Interest will accrue on your balance due until the tax debt expires. The failure to pay penalty will get added to your account until it reaches 25% of your balance. 

How often does the IRS review my financial situation under CNC status?

While you're on CNC status, the IRS reviews your income when you file your tax return. CNC files get a note put in them that says to revoke the status if the income on your filed return goes over a certain threshold. 

What happens if my financial situation improves while I am in CNC status?

If your tax return shows a higher income, the IRS will contact you to set up monthly payments. If you sell your home or other property while you're on CNC status, the tax lien will allow the IRS to claim a portion of the proceeds, and they will apply that to your tax debt.

Can I apply for CNC status if I am self-employed?

Yes, you can apply for CNC status if you are self-employed, but to maintain this status, you must pay your quarterly estimated taxes on time. You also must provide the IRS with detailed information about your business income, expenses, assets, and debts when you apply for CNC. 

What documents do I need to provide to prove my financial hardship?

You need to provide documents that substantiate the information on your collection information statement. This includes proof of income (W2s, 1099s, etc) and expenses such as rent agreements, mortgage statements, utility bills, etc. You will also need information about your assets' values and how much you owe on them. That may include appraisals, letters from real estate agents, and loan documents. 

Does CNC status affect my credit score?

No, CNC status does not affect your credit. The IRS does not report tax debt to the credit bureaus. However, the IRS will file a federal tax lien against you, and because that's a public record, it can prevent you from getting loans.

Are there any fees associated with applying for CNC status?

No, there are no IRS set-up fees for CNC status. However, if you hire a tax pro, you will need to pay them for their services. Most people find that investment to be worth it.

Here are additional FAQs about the currently not collectible status.

Get Help With IRS Back Taxes

If you're struggling with tax debt that you can't afford to repay, it's time to reach out to a tax professional. A tax pro can give you tips on the best solution for your situation. They can deal with the IRS for you. And they can ensure you get a resolution that works for your budget and your preferences. To get help now, use TaxCure to search for a tax pro based in your area today.