You owe taxes to the IRS and you’re probably thinking, “What do I do now?” While paying a tax liability in full is the quickest way to get out of tax debt, that is not always a possible choice. This leaves payment settlements that are reached between the taxpayer and the IRS. But what if it’s more complicated than that? You agree that you owe the back taxes, but you and the IRS have also determined that, even with a payment settlement, you will not be able to pay your taxes on top of your reasonable living expenses. This allows you the opportunity to declare that your account is in currently non-collectible (CNC), or hardship, status. CNC status means that a taxpayer who owes tax debt is financially unable to repay the debt for a certain amount of time. Sound too good to be true? While declaring as CNC should not be your first choice, here are some things that you should know.
Your debt does not disappear. Unlike like an offer in compromise, CNC status does not provide permanent tax relief. Once the IRS takes your income, assets, home equity, and financial standings into account for your CNC status, the IRS will not attempt to collect until you have enough financial stability or until your tax debt expires after 10 years, whichever should come first. Should you increase your finances before the 10-year statute of limitation expires, you will be responsible for your entire tax liability, as well as the interest and penalties that will accrue over time. [Note: Please be aware that you cannot “out-IRS” the IRS. Hiding money from the government will lead to financial penalties and potential criminal charges.]
You will not receive tax refunds. While under CNC status, you will be obligated to not only file any delinquent tax returns, but will also need to maintain timely filing of tax returns during the years you are claiming your account as CNC. With that said, any tax refunds that you should be expecting on those returns may be kept by the IRS and applied to your debt.
The IRS will not levy your assets or income, but may file a tax lien. Once your CNC status is approved, the government cannot levy, or take, your property and assets from you. They can, however, file a Notice of Federal Tax Lien, which acknowledges that the government is interested in your property and may levy it at a future, unrestrained time if your tax debt is not resolved. A lien can affect your credit rating as well as your ability to sell property or other assets.
So, what are the upsides?
Now that the cons are out of the way, CNC status does provide good tax relief for certain people. For instance, individuals on a fixed income that have been granted CNC status and are not in standing to make more money in the future, will eventually see their debt case closed after the expiration of the 10-year statute of limitation. It is also beneficial to people who do know that they will make substantial financial increases in the future, but need to buy themselves some more time from government harassment to get their affairs in order. No matter the form of action you want to take to handle your tax liability, the IRS collection process is never an easy one. From tax accountants to tax attorneys, here at Tax Help Network, there are professionals at the ready to guide you to your best course of action and help you get your life back on the track it deserves.