The IRS recognizes that you maybe in a financial condition that renders you unable to pay anything on your taxes.
When I represent taxpayers that are either insolvent or are having major cash flow issues, the Currently Not Collectible Status is the option that makes the most sense.
- The creation of undo hardship for you, leaving you unable to meet necessary living expenses.
- The inability to locate any of your assets.
- The inability to contact you.
- You die with no significant estate left behind.
- Bankruptcy or suspension of business activities with no remaining assets.
- Special circumstances such as tax accounts of military personnel serving in a combat zone.
Before closing your case for the reason of undue hardship, the IRS will require a financial statement from you so that they can review your finances. The review is similar to the review for an Installment Agreement request and both of these items are similar to a mortgage application. You will be required to provide similar financial documentation such as bank statements, copies of mortgage statements and car payments, pay stubs, etc. If your assets are negligible and your net disposable income is negligible, you’ll most likely to be able to obtain a CNC status.
The IRS will periodically re-examine your finances to see if your financial condition has improved to the point that some payment can be demanded. This financial review will occur about once a year and you must then complete a new financial statement. The IRS may question you by phone or in person about your updated financial information or they may simply send you the form and request that you return it by mail.
As with all information you give the IRS, make sure that what you say is absolutely truthful. The IRS may also monitor your financial condition by computerized review of your tax returns. For example, the IRS computers may flag your return if your reported gross income exceeds some pre-established amount. Remember, the IRS only has 10 years from the date of assessment to collect delinquent taxes; once the statute expires, so does your liability.
Millions of Americans have remained in CNC for years and completely avoided having to pay their back taxes. Obviously, these folks could not title assets in their own name or have significant income available for IRS levy. Still, many of these uncollectible cases enjoyed relatively comfortable lifestyles. If you maintain no assets in your own name, you have a small income, and expect your financial situation to continue, then remaining in CNC status may be your most practical remedy. However, if you do not intend on remaining uncollectible until the statute of limitations expires or you don’t want the tax liability hanging over your head, then you may want to consider an Offer in Compromise while your financial situation isn't so great.