Dealing with a large tax debt is a terrible thing. You lose sleep. You struggle to find motivation. As cheesy as it sounds, food even loses its flavor (hmmm bad pun sorry). Enter the IRS Fresh Start programs Currently Not Collectible status.
Nothing about dealing with IRS complexities is fun. Nor easy. But what do you do if you absolutely cannot pay anything? This is a legit question. You didn’t pay these taxes for a reason. If you had the money, and no real reason to save it on something else, you no doubt would have paid your debt. The answer is to somehow stop the IRS collection process.
Sometimes you find yourself in a situation where you are unable to pay your tax debt due to financial hardship and the IRS offers a lifeline in the form of the Fresh Start Program. One of the best tools in the quiver of this program is the Currently Not Collectible (CNC) status, which can provide temporary relief from aggressive IRS collection actions. In this article, we will explore what the IRS Fresh Start Program is and how the Currently Not Collectible status can help you regain your financial footing.
First: The IRS Fresh Start Program
The IRS Fresh Start Program is a quiver of tools designed to help taxpayers negotiate their tax debts and once again become compliant with the tax laws. In 2011, when the IRS created the Fresh Start program, they aimed for a program that was able to assist individuals and businesses dealing with tax problems. Its goal is to provide relief to those who genuinely can’t meet their tax obligations due to financial hardship. One of the best tools is Currently Not Collectible status.
The Fresh Start Currently Not Collectible (CNC) Status
The Currently Not Collectible (CNC) status is one of the best tools of the IRS Fresh Start Program. When the IRS assigns a taxpayer Currently Not Collectible status, it means that the IRS acknowledges the taxpayers financial situation as being so bad that they are temporarily unable to pay their tax debt.
Under CNC status, the IRS will cease all active collection efforts, such as levies and garnishments, and will not require immediate payment. The default period is 12 months, but I’ve been given as little as 6 and as many as 24.
Some Benefits of CNC Status
- Collection Activity STOPS: The most significant benefit of CNC status is that the taxpayer receives immediate relief from IRS collection activity. What this means is that the IRS will stop wage garnishments, bank levies, or type of property seizures while you are under CNC status. The most significant benefit because they will leave you alone!
- Time: Time to get your financial world in order. I recommend maintaining a sense of urgency. 12 months goes by fast and you shouldn’t waste this time. While in CNC status, you get a breather from collection activity, but you still owe the money. Plus interest and penalty.
- No Levies or Liens: Once granted CNC status, this protects your assets from being seized by the IRS. If you or a family member are having medical problems, you don’t want to worry about the IRS swooping in and grabbing the money from you bank accounts. CNC stops all levies, liens and garnishments.
- Time. Again?: This is a little secret that’s not a secret. As you may or may not know, the IRS has 10 years from the time of assessing the tax to collect. Certain activities, such as negotiating an Offer in Compromise or bankruptcy, “tolls” (stops) the 10 year clock from running. I’ve had clients legitimately receive 36 months of CNC status. That’s 30% of the statute period!
How To Qualify for CNC Status
To stop the IRS collection process, you need to demonstrate to the IRS that your financial situation is genuine and paying your tax bill would create a serious financial burden. Generally, the IRS will consider items such as income, expenses, assets, and liabilities when determining your eligibility for CNC status. It’s important to provide the IRS a clear picture of your paid through third party documentation.
If you’re self-employed, you should prepare financial statements and show hwo bad business has been. If you lost a big client or a primary supplier went out of business, you can show how this had a detrimental effect on business through documenting the issue(s). An there’s an embezzlement or some kind of disaster or casualty, document this to show how it has affected you.
Don’t try and hide anything. I had a client move money to kids accounts, even after I told him not to. The IRS knows who your kids are (you claim them on your tax return) and will ask for ALL bank statements, not just yours. Don’t lie. If you do they’ll know.
Working with a Tax Professional
No question about it. Yes.
Most tax resolution specialists know the IRS code, but more importantly, they also know the IRS Procedures Manual (IRM). Specifically chapter 5. Chapter 5 deals with how the IRS goes about collecting tax, and what they are allowed to do. At times I’ve dealt with Revenue Officers who know the IRM better than the tax code, so it’s important to call them out if they try do enforce something from the IRM that isn’t in the IRS Tax Code. If they don’t all this, go elsewhere.
This isn’t a swipe at anyone’s intelligence. It is a challenge to understand what you don’t know. It’s the wrong place to try and save money.
How I Have Used CNC Status
Now that we understand what CNC status is and how to get it, let’s look at how we can use it.
- For the primary purpose intended. It was created to stop the IRS collection process. To take the time given and facilitate a plan to improve your finances. At which time you would be able to set up an installment plan to repay the debt.
- Take the time and formulate a complex plan for an Offer in Compromise. Except for the worst cases, most taxpayers don’t come close to qualifying. We can make adjustments to your finances which may get you qualified. The self-employed use this benefit the most.
- To eat up some statute. In a lot of cases, the taxpayer has already gotten through several years of the statute.
A Mini Example:
- Hannah is experiencing some medical issues which is preventing her from working like she used to. She qualified for CNC status and was granted 12 months. Time left to collect is now reduced by a year. She stopped the IRS collection process.
- Her medical issues, although improving, still require a lot of rest. We ask for more time and are given another 12 months.
- Her health improves to he point she is able to go back to work full time. We work with the IRS to set up an installment plan.
- We will set up a partial pay installment agreement on her behalf. Since the larger amounts were so far back, she will get out of paying much of those balances.
- For purposes of this article I haven’t calculated the amount saved, but it would be at least 50%.
Fresh Start CNC Status Conclusion
The IRS Fresh Start Program’s Currently Not Collectible status can save you. I think this can be the most important tool a tax resolution specialist can utilize. You can stop the IRS collection process.
The IRS gives you an opportunity to get your finances back in order, once granted CNC status. Take a few days to decompress, but get back to work devising a plan to get you out of this mess.
If business is bad, find out why or close your doors and get a job.
If there are medical issues, you can only do the best you can. Medical problems have their own agenda, but what you can do is diligently maintain a file with information showing what you’re going through. What the Dr’s recommend, or what their prognosis is.
CNC status gives you a gift of time. Don’t waste it. If things don’t turn around, maintain a record of what you’ve done and the results. This will make it a lot easier if we have to go back to the IRS Revenue Officer and ask for another 12 months.
So there you have it. Let me know if you have any questions. I’ll do my best to get back to you.
Stay cool.
JKC