Filing for Hardship with the IRS: Being Declared Uncollectible
If you truly cannot afford to pay your IRS tax bill, you may qualify for hardship status. Hardship status applies to individuals, sole-proprietors, partnerships, and limited liability companies (LLCs). Moreover, it is also called currently not collectible (CNC) or status 53. Hardship status can stop collection activity for certain tax years where a taxpayer has a liability, but the IRS does not grant this status lightly.
To apply, in most cases, you need to give the IRS detailed financial information (not always). You have to convince the IRS you cannot afford to pay and that forcible collection would cause severe financial hardship. There are other reasons why the IRS grants CNC status.
In essence, it is forbearance by the IRS. Just like when receiving a deferment or forbearance with a student loan, interest continues to accumulate. However, with the IRS, penalties also accumulate.
Working With an IRS Representative on Hardship Status
If you have been working with an IRS representative, you can ask the IRS to mark “status 53” on your file or ask for currently not collectible status. Status 53 means the collector or IRS representative has filed Form 53 (Report of Currently Not Collectible Taxes). The IRS files this form internally. Consequently, the IRS may require you to share more information or complete more documents such as Form 433-A, Form 433-F, or 433-B. However, in some cases, if a collector knows your situation well, they may be willing to do this for you.
Applying for Currently Not Collectible Status
Usually, to get uncollectible status, individuals must complete Form 433-F (Collection Information Statement for Wage Earners and Self-Employed Individuals), and businesses need to complete Form 433-B (Collection Information Statement for Businesses). In some cases, the IRS may request Form 433-A (Collection Information Statement). It is a more extended version of Form 433-F. In some instances, if the taxpayer owes less than $10,000, the IRS may not request the taxpayer complete a Collection Information Statement. Generally, the taxpayer in these cases is disabled, incarcerated, and has limited or no sources of income.
These forms request incredibly detailed information about your financial situation. The IRS uses this information to determine your collection potential. In other words, the IRS decides if you can afford to pay them based on the financial information you provide to them using Form(s) 433. The IRS uses Collection Financial Standards to assess how much you can pay them each month. To read more details about Collection Financial Standards, see this page.
Information Required to Complete a Collection Information Statement
Here is some information you need to fill out these forms. Note that you may also have to provide copies of these documents to the IRS:
- Personal information (phone number, address, Social Security Numbers, age, details about the health of dependents, living arrangements, etc.).
- Employment information (name of employer, occupation, work phone number, pay stubs, how long employed, etc.).
- Other income (pensions, annuities, social security payments, child support, alimony, investment income, etc.).
- Bank and financial information (checking account statements, list of liquid assets, investment accounts, credit card statements, insurance policies, etc.).
- Information on any legal proceedings (for example, collection activities against you such as liens or garnishments).
- Three months worth of copies of monthly bills and expenses, which can include:
- Housing (Rent, Mortgage, Taxes, etc.)
- Apparel and Services
- Transportation Costs
- Utility Costs
- Personal Care
- Medical Expenses
- If disabled, you need to show proof such as hospital bills or government records.
- Copies of your most recent tax return(s) (IRS Form 1040, 1040A, or 1040EZ). In many cases, if you have unfiled tax returns, the IRS will ask you to file them first.
- When taxpayers owe more than $100,000, the IRS may ask for motor vehicle records, and credit reports and check courthouse records to see if the taxpayer has personal property or real property ownership.
The IRS looks at your assets and if there is no equity in them or if seizing them to pay your tax liabilities creates a financial hardship, obtaining a hardship status is more likely. For example, if the IRS takes your car, you obviously would not have the ability to get to work.
Confirming CNC Status
Once the IRS confirms CNC status, they will send you a letter, usually letter 4223, Case Closed – Currently Not Collectible. Furthermore, IRS account transcripts will have similar language.
Proving financial hardship is not easy, but it is possible if you meet the requirements. Check with a professional before trying to file for uncollectible status on your own. A licensed tax professional can help you decide if declaring hardship is the best option for you.
One thing to keep in mind is that being classified as currently not collectible doesn’t solve your tax problem, but it can buy you time to get back on your feet. It can also serve as a great option if you do not expect your income to rise in the future (e.g., you are retired). If your situation does not change by the time the CSED(s) or collection statute expiration date arrives for a given year, the taxpayer will no longer have to money owed for that year. You can find answers to frequently asked hardship questions here.