IRS Currently Not Collectible
Chapter 5 of the Internal Revenue Manual (IRM) is the portion of the manual focused on IRS collections. Internal Revenue Manual 5.16.1 is the part of the IRS tax manual that discusses “currently not collectible” status for a taxpayer. Currently not collectible (sometimes, people mistakenly refer to it as IRS currently non-collectible status) is when the IRS acknowledges that the taxpayer cannot make payments and will therefore suspend IRS collections actions.
Currently Not Collectible Bad News
However, if the IRS puts a taxpayer on “currently not collectible” status, IRS tax penalties and interest will continue to be assessed, grow and accrue. So if the taxpayer is taken off of CNC status (because they get a job, inherit money, etc… for whatever reason are deemed “collectible,” they will potentially face a much greater IRS tax liability.
The IRS periodically (about every two years) reviews taxpayers on CNC status to determine if that designation is still appropriate or whether IRS collections efforts should resume.
Currently Not Collectible Good News
When put on IRS “currently not collectible” status, the taxpayer doesn’t have to worry about an IRS levy against their bank account, IRS garnishment of wages, etc. - usually for a period of two years. CNC means all enforced tax collections efforts cease and desist.
But, if the IRS suspends collections activities, through the 10 year IRS collections statute of limitations, the IRS tax lien will become completely uncollectible.
What if the IRS resumes collections activity before the two-year CNC period elapses?
A taxpayer will receive a “case closed: currently non collectible” letter from the IRS. The IRS typically reviews CNC status taxpayers every two years. However, it is possible for a taxpayer to get a notice that the IRS is resuming collections/levy activity before two years if the IRS is monitoring something in the taxpayer’s financial life that brings the collectibility issue to their attention.
If the levy notice comes prior to two years of being placed in currently non-collectible status, call your IRS debt lawyer and they will call the 800 number on the IRS letter to advise them that the taxpayer is in the middle of an approved CNC status period and, if true, will try to argue that the IRS levy will create an undue economic hardship.
If the IRS does not agree to withdraw the levy, then your tax attorney will fill out Form 911 to get the local IRS taxpayers advocate involved.
What if I am currently in “currently non-collectible” status but can get a loan to make an offer in compromise?
Based on Form 433-A (OIC) your tax lawyer would have to calculate a reasonable offer in compromise that the IRS would accept. If it is possible to get a family member or friend to loan what would likely amount to a drastically lower number compared to the actual IRS tax debt, then it might be a good idea to make the offer. It would have to be clear to the IRS that the offer in compromise is based on a conditional loan from a relative or friend who will only loan the money upon the offer in compromise being agreed to by the IRS. The taxpayer wouldn’t want to just get a loan and deposit it into their bank account because that would just show up as an asset available to the IRS.
This OIC/CNC strategy can be done while the taxpayer remains in currently non-collectible status with the IRS.
What if the taxpayer only has social security income and a fully-paid off house - will they be deemed “currently not collectible” by the IRS?
Probably not. The IRS could very likely look to the equity of the home and require the taxpayer to pull equity out of the house (i.e. get a mortgage) in order to pay taxes owed to the IRS.
However, sometimes this is a strategy used by your IRS lawyer. For example, if the taxpayer’s reasonable living expenses are high enough, and social security (or other sources of) income is insufficient to pay those expenses, your IRS tax attorney might have their client think about a reverse mortgage (or similar tool) and justify it as necessary for the taxpayer to have money to pay expenses that will be accepted by the IRS. When done properly your tax advocate can justify an offer in compromise - doubt as to collectibility based on “special circumstances” unable to pull additional money out of the house’s equity.
What Happens if you Fail to File your Taxes?
Erroneously, some US taxpayers who owe money in one year, decide not to file their taxes in the following year, hoping that by not filing their tax return, they will somehow be off the IRS radar. Then, when the subsequent years come along, they think, “well, I can’t file a tax return now because that will just bring my prior years of being a non-filer to the IRS’s attention!” This can result in multiple years of unfiled tax returns. If this sounds like you, take heart in knowing that you’re not alone in being a non-filer - in fact the IRS says that about 5% of the US populations fails to file a tax return each year. However, also be aware that the IRS doesn’t simply forget about you. The time to seek IRS tax counsel advice is now!
IRS tax attorneys typically get called after three or four years of not filing taxes because the IRS will wait three years before they prosecute a taxpayer for being a non-filer.
How does the IRS find non-filers in order to prosecute them?
Typically its when another party files a document, such as 1099 or W-2. When someone else pays you more than $600, they are supposed to file a 1099 with the IRS indicating what you were paid (if its your employer, they file a W-2 for your wages).
Other ways the IRS finds out about people or businesses that fail to file their tax returns or when businesses fail to pay the right amount of taxes is when prior employees or ex-spouses want to get back at who they perceive has done them wrong. The IRS also sometimes specifically targets industries that are notoriously difficult to find by comparing 1099s or W-2s. In addition, when the IRS is auditing one company and they see that another company or contractor is consistently being paid in cash, they may check to see what that cash-heavy business is reporting to determine if they should be put into collections as well.
How many years of tax returns must I file to be IRS compliant?
You might have assumed that taxpayers have to file every year to be deemed compliant. However, serial non-filers will be delighted to learn that IRS Policy Statement P-5-133 (see Internal Revenue Manual 22.214.171.124.18) from 2006 says that delinquent tax filers need only file 6 years (from the most recent year) of tax returns in order to be deemed “compliant.”
Don’t get too excited. This does not mean that the IRS will forget about tax liabilities assessed from seven or more years ago (although the collections statute of limitations is 10 years) when I didn’t file a return. The fact is, the IRS can file a “substitute for return” or SFR…. essentially the IRS can file a return for you and base tax assessments and penalties off of those returns.
How to (Potentially) Avoid Failure to File IRS Tax Return Penalties
When filing prior years unfiled tax returns (one year at at time to prevent IRS from claiming a year wasn’t received….also ask your IRS tax lawyer about the small “dollars and cents” check you may want to include with each tax return filed. But along with your tax return, your tax liability professional will also “request non-assessment” of failure to file penalties and failure to pay penalties. Requesting IRS penalty relief for reasonable cause actually requires a good reason. Reasonable cause (e.g. serious sickness/death of primary taxpayer, hurricane, or other reason why taxpayer, despite reasonable efforts, was unable to pay or unable to file their tax return).
Even if the IRS disagrees with the reasonable cause argument for non-assessment of failure to file or failure to pay penalties, your IRS tax lawyer may utilize it to set up your request for first time penalty abatement.