We regularly meet with clients of our accounting firm who owe taxes to the IRS that they cannot afford to pay due to a financial hardship. Sometimes it is a tax bill for one year. Frequently it is a tax bill for multiple years.
The IRS offers a number of solutions that provide tax relief to taxpayers who find themselves unable to pay their taxes. These solutions apply to both individuals and businesses.
The solution that we are covering in this article is the IRS Hardship Program. It is also called Currently Not Collectible, CNC or Currently Uncollectible Status. IRS employees sometimes used the term “Status 53” for this program.
Before the IRS will consider placing an account in CNC status, it is necessary to file any past due tax returns to demonstrate compliance and address back-tax liabilities.
The legal source for the IRS Hardship Program is IRC Sec. 6343(a)(1)(D). This provision prohibits the IRS from enforcing tax collections in cases of economic hardship due to the financial condition of the taxpayer. Additional details of the program are enumerated in the Internal Revenue Manual, Part 5, Chapter 16, Section 1 (IRM 5.16.1).
IRS Hardship Program Provides “Currently Not Collectible” Status and Stops the IRS From Collecting Back Taxes
The IRS Hardship Program provides currently not collectible status (also called non collectible status) for IRS tax purposes. This change in status puts a hold or stop on all IRS collection activity.
Currently not collectible status will stop the IRS from sending nasty collections letters and notices, as long as you are a participant in the program and continue to experience economic hardship. And most importantly, the IRS will not be able to levy or seize your assets, or garnish your wages, during this time. However, even when a taxpayer is under Currently Not Collectible status, the IRS continues to impose monthly late payment penalties and interest on the owed balance.
Alternatives to the IRS Hardship Program include the ever popular Offer-in-Compromise, the Installment Agreement or Payment Plan, and Bankruptcy. Bankruptcy is done through the courts and is not an actual program offered by the IRS.
IRS Hardship Program: How to File for Hardship Relief with the IRS
In order to qualify for currently not collectible status with the IRS, you are required to demonstrate financial or economic hardship by providing detailed information about your financial status. This is done by submitting IRS Form 433, the collection information statement (sometimes called the IRS hardship form), which serves as the IRS Hardship Program request form.
Form 433 summarizes your financial situation. It uses mathematical tests to determine whether or not you meet the definition of financial hardship for tax purposes.
The Form 433 collection information statement comes in several formats. These are:
- Form 433-A: for wages earners or self-employed individuals
- Form 433-A (OIC): for offers in compromise
- Form 433-B: for businesses
- Form 433-F: a simplified version of Form 433-A. The IRS usually asks for this form in hardship cases.
The IRS hardship relief form is available online. See the above links to view the forms.
How Do I Qualify for IRS Hardship Relief
Form 433 requires the preparation of financial statements and the attachment of documentation and support for your numbers. It is not an easy form to complete. However, the effort to complete Form 433 is worth the reward if you qualify for the IRS Hardship Program which puts a hold on IRS collection activity.
Form 433 is used by the IRS to evaluate your ability to pay for food, housing, vehicle expenses, utilities, clothing, transportation, medical treatment, and other essentials, including allowable monthly expenses.
Form 433 requires the taxpayer to disclose:
- Everything they own, including back account information, retirement accounts, investments, cars, real estate and life insurance
- Fair market value of assets owned
- Summary of income received over the past three months
- Summary of expenses over the past three months
Be prepared to attach recent paystubs and at least three months of bank statements to your Form 433.
Hardship Calculations
The determination of financial hardship is evaluated on a case by case basis. It is based on two calculations:
- First, net equity in assets is calculated. Net equity means fair market value, less debt. A common example of debt is as a mortgage or home equity loan. Assets used for this test includes your residence, automobiles and investments.
- Second, gross monthly income is calculated, less “allowable expenses.” It is important to note that the IRS has very specific guidelines about what are considered to be allowable expenses for purposes of the IRS Hardship Program.
Eligibility
If these two calculations show that you do not have the funds to pay the back taxes, then the IRS will recognize your hardship and you will be deemed to be currently not collectible. This is confirmed by IRS Form 4223.
At this point, all IRS collection activity for the taxes will come to a stop, including
- IRS collection letters and notices
- Levies on bank account and other assets
- Wage garnishments
Interest and Penalties
Even if a taxpayer is considered to be non collectible and in a hardship status, the taxes are is still owing to the government. Importantly, interest and penalties will continue to accrue.
Making payments toward the tax bill will, of course, minimize interest and penalties.
Strategies for the Hardship Program
There are a number of available strategies to consider when applying for currently non collectible status. Be sure to discuss these with your CPA.
- The IRS allows current income numbers for purposes of these calculations. This helps your case if you have recently lost your job or had a recent decrease in earnings (such as during the COVID pandemic).
- The IRS will not require you to include equity in assets in the second calculation if banks will not approve a loan against the equity. Therefore, if you cannot get a loan to pay the tax, such as a home equity loan or refinancing, the equity should be excluded from the net available equity in assets calculation on Form 433.
- Making federal tax deposits is crucial for businesses and self-employed individuals to avoid complications with tax debts. Missing these payments can result in accruing penalties and interest, which can further complicate your financial situation.
For the second strategy, we recommend that you apply for home equity loans at three banks. If you get rejection letters from the banks, be sure to keep copies. These letters are ideal proof to the IRS that you cannot borrow against the equity in your house to pay off your taxes.
IRS Hardship Program and Federal Tax Lien
Even though a taxpayer is deemed to be currently uncollectible, the IRS may still fill a Notice of Federal Tax Lien. Expect the IRS to file a tax lien on your property if you owe more than $10,000 in taxes.
The purpose of a federal tax lien is for the IRS to secure its interest in assets that the taxpayer currently owns or acquires in the future.
A federal tax lien will make it harder (but not impossible) to sell your property. Check out our article on Federal Tax Liens to learn about selling a house or refinancing a mortgage while under a federal tax lien.
Currently Not Collectible Status and Tax Refunds
Although the Hardship Program stops IRS collection activities while you are deemed currently not collectible, the matter of tax refunds is different.
If you are due a refund from a filed tax return, expect the IRS to keep the refund and apply it to your tax debt. This is common.
Therefore, we suggest that taxpayers in currently not collectible status carefully monitor their tax withholdings and estimated tax payments to avoid overpayments. Ask your CPA to do a tax projection for you, so that you pay just the right amount of tax. You don’t want too show a refund on your tax return.
Appeals
Your CPA may take your case to Appeals if your application for non collectible status is rejected.
Appeals is not as scary as it sounds. Typically, the taxpayer is not even there. The CPA handles the whole matter under a Power of Attorney.
We typically have very good results when we take case to Appeals.
Hardship Tax Relief: How Long Does It Last?
It is important to note that Currently Not Collectible status is temporary. The IRS will review your numbers every two years or so to see if your financial situation has changed.
If the IRS determines at some point that you are now able to pay the tax, then IRS collection activities will resume, including notices, levies and wage garnishments.
What to Expect After Requesting CNC Status
After you request Currently Not Collectible (CNC) status, the IRS will conduct a thorough review of your financial situation. This involves examining your income, expenses, assets, and debts to determine if you qualify for CNC status. Be prepared for the IRS to request additional information or documentation to support your request.
Once the IRS has reviewed your information, they will notify you in writing of their decision. If your request is approved, you will receive an annual statement from the IRS showing the balance of your tax debt, including any accrued interest and penalties. It’s important to note that CNC status is not permanent. The IRS may require you to reapply for CNC status annually or if your financial situation changes significantly.
Understanding what to expect after requesting CNC status can help you navigate the process more smoothly. Remember, you have the right to appeal the IRS’s decision if you disagree with it. Consulting with a CPA can provide valuable guidance and support throughout this process.
Benefits and Drawbacks of CNC Status
Currently Not Collectible (CNC) status can be a lifeline for taxpayers struggling to manage their tax debt. One of the primary benefits of CNC status is the temporary relief from IRS collection activities. This means no more stressful collection notices or phone calls, and crucially, protection from levies and garnishments on your assets and income. This respite allows you to focus on other pressing financial obligations and work towards stabilizing your financial situation.
However, CNC status is not without its drawbacks. While your account is in CNC status, interest and penalties on your tax debt will continue to accrue, potentially increasing the total amount you owe over time. Additionally, any future tax refunds you are entitled to will likely be applied to your outstanding tax debt, reducing the amount of refund you receive. It’s also important to remember that CNC status is a temporary solution. The IRS will periodically review your financial situation, and if they determine that your ability to pay has improved, they may remove your account from CNC status and resume collection activities.
IRS Currently Not Collectible Status and the Statute of Limitations
The 10-year IRS Statute of Limitations (also called the CESD) continues to run during the period that you are not collectible. Therefore, with careful planning, the statute of limitations may expire while you are not collectible due to a hardship.
And if the IRS Statute of Limitations expires while you are currently not collectible, the IRS will write-off your tax in full.
The tax will simply go away.
Wouldn’t that be great news?!
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Massey and Company CPA is a boutique tax and accounting firm serving individuals and small businesses in Atlanta, Chicago and throughout the country. Our services include tax return preparation, tax planning for businesses and individuals, estates and trusts, IRS tax problem resolution, IRS audits, sales taxes and small business accounting and bookkeeping.
