The Internal Revenue Service’s collection of tax debts is supposed to be completed in a fair and equitable way. Taxpayers are classified into categories based on specific factors, and the different categories are referred to as a status. Status 53 is a category of classification used by the IRS for people who owe tax debts but who are not currently able to pay what they owe with their current income and still keep a roof over their heads. People who are categorized as being in Status 53 are considered Currently Not Collectible, or CNC for short. The Currently Not Collectible status means that the IRS will temporarily stop enforcement efforts until and unless the taxpayer’s financial situation improves and allows them to repay what is owed.
When accountants and tax attorneys have clients who simply do not have the assets or income to pay their tax debts, the CNC status might be an option. For other clients who have the ability to pay a portion of their tax debts within a reasonable time but not their entire balances, an Offer in Compromise might be a better choice. While the Collections division of the IRS will generally try to get taxpayers to enter into payment plans to repay their debts or take other enforcement measures, it is possible for experienced tax professionals to help some clients be deemed to be in Status 53 to provide them relief at least temporarily.
What is Currently Not Collectible status?
Status 53 or currently not collectible (CNC) means that a taxpayer will not have enough money to pay for their basic living expenses if they are required to make monthly payments to the IRS through an installment agreement. Under IRM 18.104.22.168, a tax debt might be deemed to be currently not collectible when a taxpayer does not have any income or assets the IRS can levy to enforce the debt. However, the IRS might also place a taxpayer in currently not collectible status when the enforcement of tax debt through payments would cause him or her to be unable to meet his or her basic living expenses. To determine whether this might be true, the IRS will evaluate the taxpayer’s finances to determine whether the taxpayer would face a true hardship through tax payments instead of simply being placed at an inconvenience.
The IRS can deem a tax debt as uncollectible when the taxpayer submits enough financial documentation to show that he or she will not have anything left over to make payments to the IRS after paying their monthly allowed living expenses from all income sources. If the IRS places the taxpayer in currently not collectible status, enforcement actions, including levies, asset seizures, bank levies, and garnishments, will not be taken as long as the taxpayer remains in status 53.
However, the taxpayer must submit substantial documentation to support the designation of a currently not collectible status. If the taxpayer is an operating business, the documentation required will be even more extensive. Taxpayers will likely have to submit documentation of current payments and loans, bank and other account statements, proof of recurring monthly bills, information about all assets and income sources, and expenses from vendors and service providers. If the information documenting a taxpayer’s assets and liabilities is not sufficiently detailed, the request for currently not collectible status will likely be denied. These types of documents are meant to prove that the requesting taxpayers will endure financial hardships if required to make monthly payments to the IRS for the owed debts.
Revenue officers vs. Automated Collections
Revenue Officers have more experience than other tax collections professionals within the IRS and are specifically trained to collect delinquent tax debts. A Revenue Officer has several duties, including interviewing taxpayers in person, collecting and analyzing financial data to determine whether a taxpayer has the ability to pay, creating tax repayment plans to allow taxpayers to repay arrearages over time, and seizing property and garnishing wages to enforce tax debts. Revenue Officers can also commence administrative proceedings and refer taxpayers to other IRS departments for judicial action.
If a taxpayer is assigned a Revenue Officer, the officer will pour over the financial information the taxpayer submits. They will then make recommendations or issue demands about cutting back on expenses to make payments to the IRS. Under the rules, taxpayers are expected to prioritize the repayment of tax debts over other types of expenses. Substantially fewer businesses are accepted into CNC status as compared to individual taxpayers.
Individual taxpayers are likelier to be assigned to the Automated Collections system. ACS is generally easier to deal with since the operators are not personally invested in individual cases. When a taxpayer calls into the ACS, they will be given the operator’s employee number and name. The taxpayer should write down this information in case they have to call back again.
Collection Financial Standards used by the IRS
The IRS has collection financial standards in place that limit how much taxpayers are allowed to pay each month for certain expenses. These limits are divided into several categories, including the following:
- Clothing and services
- Housekeeping supplies
- Personal care supplies and services
- Miscellaneous expenses
- Out-of-pocket health care expenses
These categories fall under the national standards for food, clothing, and other expenses and the national standards for health care costs. The national standards place limits on each of the above-listed expense categories that apply no matter where a taxpayer lives in the U.S.
When taxpayers try to negotiate with the IRS, the agency will refer to these standards when trying to resolve tax liabilities strictly when the taxpayers are requesting placement into a currently not collectible status.
It is still possible to obtain a variance from the IRS for a particular expense category. However, the taxpayer must have a compelling reason before a variance will be granted. For example, if a family has a child with special needs, they might be granted a variance in the allowable expenses to pay for care or education. In general, however, taxpayers will not be granted variances simply because they pay more than the median in their areas for housing, education, care, or other similar expenses.
How taxpayers qualify for CNC status
The procedures followed by the IRS for currently not collectible status are listed in IRM 5.16.1. Since all collection activities will immediately stop when CNC status is granted, taxpayers must provide proof that they do not have the ability to repay their debts. The IRS will ask individual taxpayers to submit Form 433-F, which is the collection information statement or CIS. This form requires the taxpayer to provide detailed information about their assets, income sources, and regular expenses. The IRS considers requests for CNC status on an individual basis.
If the taxpayer owes a large arrearage, he or she might be required to file Form 433-A. This form requires taxpayers to provide even more detail about their finances than what is required on Form 433-F. Finally, self-employed individuals will be asked to complete Form 433-B for their businesses. Even if the taxpayer’s business is operating as an otherwise disregarded entity, the business will be treated as a separate entity from the taxpayer when the IRS is determining placement into CNC status.
How long does CNC status last?
CNC status is considered to be temporary. When a taxpayer’s debt is deemed to be currently uncollectible, the taxpayer will be allowed more time to improve his or her financial situation so that he or she can repay the debt. During the time a taxpayer is in CNC status, the tax debt will not be eliminated. Instead, the IRS’s enforcement efforts will be temporarily suspended. Interest and penalties can still accrue.
The initial CNC status will last for one year. When a taxpayer files a new tax return after being placed in status 53, the IRS will examine the return to determine whether the taxpayer has recovered enough to start repaying the tax liability. The IRS can ask for additional information from the taxpayer to determine whether the taxpayer’s financial situation has improved enough to begin making payments. If the IRS determines that the debt remains uncollectible, the CNC status will be continued over to the next tax period.
If the taxpayer’s debt cannot be collected within 10 years of the initial due date, the IRS cannot sue to collect the debt. There is a 10-year statute of limitations for the collection of income tax debts. However, there are some exceptions to this rule. For example, if a taxpayer failed to file a tax return, the statute of limitations clock does not begin to run until the return is filed.
When a taxpayer is in status 53, the limitation period will continue to run. If the IRS cannot collect the debt before the statute of limitations ends, the tax debt will expire.
Denial of CNC Request
If the IRS finds that a taxpayer does not qualify for CNC status, a forbearance might be granted. The IRS might grant a reasonable forbearance to a taxpayer in which it agrees not to take certain types of collection actions if the taxpayer would be unable to afford critical living expenses after paying his or her tax debt. For example, the IRS might decide against seizing a car since doing so might keep the taxpayer from being able to go to work to earn an income. The taxpayer’s individual circumstances will be considered, including his or her health or age.
Four Critical Aspects of Requesting Status 53
There are four crucial aspects of requesting Status 53 that taxpayers should know. If they withhold relevant information or provide false information, they could be criminally prosecuted. Taxpayers should never fudge numbers to try to be placed in CNC status. A taxpayer who can barely afford a monthly payment might instead try to negotiate a partial installment payment agreement or make an offer in compromise to settle the tax debt.
The second aspect of requesting status 53 concerns the statute of limitations. The limitation period will continue to run during the CNC status. When the limitation period ends, the tax debt will expire. This means that someone who remains in CNC status for the entire limitation period will not have to repay the debt.
The state in which a taxpayer lives might review his or her financial situation more frequently than the IRS when the taxpayer is in CNC status. For example, while the IRS might review the taxpayer’s finances every year, the state might review it every six months.
Taxpayers who are approved for CNC status cannot simply forget about the IRS. If they accrue new tax liabilities while in status 53, they may be kicked out of the status. They can also be terminated if they fail to respond to a request for information from the IRS.
CNC vs. OIC
For some taxpayers, an offer-in-compromise might be a better option. Qualifying taxpayers who have their OICs approved will have the benefit of a binding contract to settle their tax debt once and for all. Once the IRS accepts an OIC, the taxpayer will only have to adhere to its terms to resolve the tax debt. By contrast, status 53 will mean that the tax liability will last for the duration of the limitation period and force the taxpayer to undergo periodic financial reviews. An income increase can cause the IRS to determine the taxpayer can afford to repay the debt and force the taxpayer into repayment and out of CNC status.
The IRS has the right to review financial information periodically since the tax debt is not forgiven while the taxpayer is on CNC status. If a taxpayer reports more income on an income tax return than when they were placed on CNC status, they will likely be required to begin making monthly payments to the IRS. By contrast, a taxpayer whose OIC is accepted by the IRS will have the balance of his or her tax debt forgiven as long as he or she adheres to the terms of the offer-in-compromise.
Tax professionals with clients whose income, assets, and expenses prevent them from repaying their tax debts might consider status 53 as a good option for resolving tax debts. However, they will need to ensure that their clients’ expenses do not exceed the allowable expenses and that everything is thoroughly documented and accurately reported.
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