The IRS is not heartless. It won’t demand taxes from people whose degree of financial hardship is so severe that paying their tax liability would leave them with the inability to buy basic needs, such as food. The IRS grants ‘currently not collectible’ (CNC) status to those who qualify, stopping collection activities such as property seizure, wage garnishments, and bank account levies.
However, CNC status is not granted to just anybody who claims their financial hardships keep them from fulfilling their tax responsibilities. Achieving CNC status requires a process in which the IRS determines whether the code applies to the circumstance.
To qualify for CNC status, your financial records need to prove that paying taxes leaves you with little to no funds left over for basic and necessary living expenses.
Proving financial hardship requires disclosing personal financial records, such as bank accounts, retirement savings, and investment portfolios. You will need to include a list of everything you own and the corresponding market value of each asset. Other financial reporting documents that the IRS will request will consist of income statements and spending statements.
The IRS will analyze your financial records to see if you can pay your tax debt with an installment agreement. The IRS may even determine if your assets can be used to pay your debt, or the agency may set limits on your expenses.
Being unemployed and relying solely on unemployment compensation is a reason to claim financial hardship. Unemployment compensation is classified as government assistance. Therefore, it wouldn’t make sense for the government to ask you to pay taxes with money that comes from taxes. This applies to other forms of government assistance, such as Social Security, disability, and other programs designed to help citizens meet their minimum needs.
You or your tax professional can contact the IRS to request CNC status. To demonstrate your inability to pay your tax debt and not make monthly installment payments, you should be ready to provide the necessary financial records.
Considering you’ll be asked to file past due returns, complete various IRS forms, and submit sensitive financial records, some people may find applying for CNC status not worth the effort. It’s also important to remember that you can only request CNC for a specific tax period, and a CNC status does not automatically roll over into the next year, regardless of whether your financial situation remains the same. In future years when your financial situation has improved, the IRS may take any refunds until you pay off your tax bill. And if you owe more than $10,000, the IRS will likely file a federal tax lien.
So, before you consider CNC status, we recommend having a tax professional analyze your situation. Achieving CNC status may only provide temporary relief, and it’s unlikely you want to suffer from financial hardship just to get out of paying taxes.
Contact us at 206-970-4477. Talk with a Tax Resolution Expert today. We’re here to help Seattle business owners with their tax concerns and troubles.