Tax Law Insights

If an individual or business owes federal taxes and does not have the current ability to pay these taxes, the IRS can consider placing the account into "currently not collectible" (CNC) status. If placed in CNC status, a taxpayer is not required to make a current payment on the unpaid taxes to the IRS, and the IRS will also not "levy" or "garnish" wages or seize bank accounts while an account is in CNC status.

Before the IRS will consider placing a taxpayer's account into CNC status, the individual or business must be up-to-date or "current" with the filing of their required tax returns, and, for individuals, must also be having withholdings taken from their paychecks or making quarterly estimated payments towards their current-year taxes. The taxpayer must also provide the IRS with financial information in order to demonstrate there is no ability to make any payment on the back taxes.

The downside of being placed into CNC status is that while an individual or business is not required to make current payments to the IRS on a back-tax liability, all penalties and interest continues to grow at full rates - and the IRS comes back! CNC status is temporary. The IRS will periodically check on a taxpayer in CNC status, every 6 months or a year, and the taxpayer must provide updated financial information or be kicked out of CNC.

If a taxpayer can qualify for CNC status, the taxpayer may also qualify for an Offer in Compromise (discussed in an upcoming post in the series), and where the taxpayer can actually settle his, her, or its tax debt and not owe anything more. IRS representatives generally will not identify an Offer in Compromise as an available tax collection alternative, but will seek to put the otherwise qualifying individual or business into CNC status - and so the IRS can come back later!