Recently, we have seen TV commercials and heard radio ads that discuss the IRS’ “Currently Not Collectible Tax Program” or “CNC Tax Program” or “Reduced Settlement” or “IRS Hardship Program”, which is “available for a limited time only.” In reality, there is no such “program” and there never has been. Thus, there is no “limited time” to apply.
The IRS places certain delinquent tax cases in a “currently-not-collectable” (“CNC”) status, after its agents have determined that there is no ability to collect the taxes from the delinquent taxpayer.
The typical scenario is as follows. A taxpayer falls behind in filing tax returns, paying taxes, or both. The IRS will eventually attempt to collect the taxes and/or missing tax returns through its notice process, by phone calls, or via home or office visits. If these attempts fail, the IRS will begin enforced collection action, which may include garnishing salaries, seizing bank accounts, recording tax lien notices, and seizing other assets.
If at any point in this process the taxpayer can demonstrate that the payment of the back taxes, either through voluntary or enforced means, would create an “economic hardship” on the taxpayer, then the IRS will close the collection case by placing the taxpayer’s account in “CNC” status. This simply means that the IRS inputs a computer code on the taxpayer’s account that reflects the fact that the taxpayer cannot afford to pay the back taxes and meet his or her minimum monthly living expenses. It is important to recognize that what the taxpayer may view as a hardship, the IRS may view as just an economic or personal inconvenience.
In most cases, the IRS will not cease collection action until the taxpayer is in compliance. What that means is that the taxpayer must file any missing tax returns and must address any ongoing underpayment situation. For example, if the reason the taxpayer owes delinquent taxes is because the taxpayer does not have sufficient income tax withheld from his or her paycheck, the IRS will not close the case as CNC (and will not suspend enforced collection action) until the taxpayer adjusts his or her withholding. Also, if the taxpayer is self-employed, the taxpayer will be required to become current with estimated tax payments prior to the IRS halting collection action and placing the case in CNC status.
Generally, detailed financial disclosure is required prior to the IRS closing a collection case as CNC. Usually, IRS Form 433-A or 433-F must be submitted along with documents that substantiate the taxpayer’s income, assets and expenses. These documents may include paystubs, mortgage statements, car loan statements and so forth.
If the IRS allows a case to be closed CNC, the case will usually automatically be re-opened and returned to active collection status if the taxpayer fails to file a tax return in the future, accrues a new tax liability, or the taxpayer’s financial situation changes sufficiently to allow payments to be made against the back tax debt. For example, when the IRS closes a case CNC, they close it CNC at $35,000. If the taxpayer’s annual income exceeds $35,000 in the future, the case will be reactivated and sent back to collection.
Also, in some cases, the IRS places a follow-up date on any particular case. When that date arrives, the IRS reactivates the case and sends it back to collection. For example, the IRS may close a case CNC with a two year follow-up. After two years, regardless of any other fact, the case is sent back to collection.
Be aware that CNC status is usually a temporary solution and not the pie in the sky tax relief. The tax is not forgiven or compromised, and interest and penalties continue to accrue.