Sometimes your financial fortunes take a turn for the worse, and you find yourself owing back taxes to the Franchise Tax Board. You don’t even have two coins to rub together, much less make installment payments, yet you are looking for an alternative to filing for bankruptcy. An Offer in Compromise is also off the table; you just don’t have the money.
Under certain circumstances, you may be eligible for an IRS and FTB program in which your account can be labeled as Currently Not Collectible.
What Does Currently Not Collectible Mean?
Currently Not Collectible (CNC) is a status used by the IRS and FTB for taxpayers suffering extreme financial hardship and cannot afford to pay their back taxes. The taxpayer’s account is placed on hold or suspended. It will be reviewed at a later date for possible collections.
The IRS and FTB will cease all phone calls, notices, wage garnishments, and bank levies. You may receive a periodic statement showing your balance owed but no demands for payment. However, the tax agencies may file a lien on your property to secure their interests.
Further points to understand:
- CNC status is not permanent.
- Interest and penalties still accrue to your account, including the failure-to-pay penalty.
- Any tax refunds will be retained and paid toward your tax bill.
- It does not “settle” your back taxes; it simply delays payments for a time.
Also, the clock continues to run on the statute of limitations. There is the potential that the time the tax agencies have to collect will expire while your account is CNC. In that case, collections actions stop.
You may make voluntary payments without fear the Currently Not Collectible status will be rescinded because of them.
How Do You File for CNC Status?
Filing for Currently Not Collectible status requires close attention to the paperwork. Knowledge of the California state rules and regulations on taxes is also a requirement. A tax attorney has the knowledge and ability to help you with the process.
The decision to place a taxpayer’s account on CNC is based on an examination of your Collection Information Statement (CIS) that has been completed updated to the time of the examination. A Tax Compliance Officer takes the CIS as well as your health and age into account when making the decision.
If the FTB believes that in the future their collection efforts will be successful, a state lien will be filed against you before your account is officially declared CNC.
What Is Financial Hardship?
To obtain CNC status, you must be able to prove financial hardship. What you feel is a financial hardship may not match the requirements of the tax agencies. For example, when your financial picture is reviewed for CNC, you are budgeted a certain amount per week for groceries. In California, groceries are more expensive than the same groceries would be in Nebraska. However, the agency depends on the grocery price averaged across the country. Even though the California prices are higher, it will not make a difference in your designation for economic hardship.
Currently Not Collectible status is meant for severe economic hardship; it is not easily granted. Once it is, your financial status must change significantly for it to be revoked. At that time, the FTB (and the IRS) will resume collections via payment in full or through an installment agreement. For this reason, you must keep your tax status and filings up-to-date throughout your time on CNC status.
What Are the Effects of CNC Status?
If your account is placed on CNC status, it is taken temporarily out of collections. Wage garnishments, asset seizures, and bank levies will end or never be started. CNC is a time for the taxpayer to focus on meeting personal expenses without being placed in further hardship.
Periodically, the IRS and FTB will re-evaluate your situation to see if your financial status has changed enough to begin collections again. The IRS re-evaluates every 12 months while the FTB offers CNC status in six, nine, and twelve month periods between reassessments.
Although collection attempts will cease during CNC status, the Franchise Tax Board will place a lien on any property you have to secure their interests. A Notice of Tax Lien places a negative impact on your credit score and can make it difficult to sell the property, even though your intent is to use the proceeds to pay your tax bill.
Is a CNC Status the Best Remedy?
While receiving a Currently Not Collectible status can relieve the necessity to pay money you do not have, it is not a situation that benefits anyone, you or the tax agencies.
If your financial situation is such that you qualify as an extreme hardship case, you are already in bad shape. Nobody would want to remain in that position for long, even if improving your financial picture means you must pay taxes again.
Don’t forget, interest and penalties continue to accrue on the unpaid balance, and you must continue to file your tax returns every year to avoid additional penalties for failure to file.
Leaving yourself and your family in such limbo means you still have all the stress of paying for your personal expenses with nothing to cushion further economic blows. If you hope to wait out the statute of limitations for collections in the state of California, you must remain in extreme financial hardship for up to 20 years, double the statute of limitations for IRS collections.
Obviously, the inability to collect taxes does not benefit the state or the federal government because that means less money is available for government services.
Clearly, CNC status is meant for those in the very worst of financial circumstances, and it is not a permanent remedy. Currently Not Collectible status merely delays the requirement to pay taxes and does not settle your back taxes. Interest and penalties continue to swell the tax burden.
If you can, instead, arrange an installment payment agreement, the interest accrual only impacts the remaining balance. Each time an installment is paid, the balance is lower, meaning less interest will be charged.
An Offer in Compromise allows you to settle your tax bill for less than you owe. Your account will no longer accrue interest and penalties because your tax debt is considered to be paid off.
Both of these remedies do far more for your situation than CNC status because they eliminate your tax burden and allow you see the light at the end of the tunnel.