Once the Internal Revenue Service (the “IRS”) has begun collection action, the taxpayer has several options. One of which is establishing a Currently Not Collectible, or “CNC” status. To qualify, a taxpayer must demonstrate that payment of the tax liability would impose a financial hardship.
Financial hardship means that paying the tax liability would leave the taxpayer without sufficient resources to cover necessary living expenses1. Upon establishment of CNC status, all IRS collection and enforcement activity is suspended. In other words, the taxpayer will no longer have to worry about wage garnishments or bank levies.
Establishing CNC status does not relive a taxpayer of underlying liabilities, and therefore it is important to know that penalties and interest will generally continue to accrue. Further, tax liens may be placed on a taxpayer’s property and all returns must be filed, to date, for qualification.
CNC is not a permanent status, and it requires documentation of a number of details regarding income and expenses. It provides temporary relief for those taxpayers with an overwhelming tax liability. While in not collectible status, the 10-year statute of limitations on tax debt collections continues to run, and if the IRS cannot collect the tax within the 10-year period, the tax debts will expire, unless the IRS converts the amount owed to a judgment. However, upon improvement of a taxpayer’s financial situation, it is likely that IRS collection activity will recommence.