Taxpayers that are unable to pay any amount of tax debt due to financial difficulties may be assigned Currently Not Collectible (CNC) status. The IRS qualifies a taxpayer for CNC only in certain cases. These include:
- Inability of the IRS to locate or contact the taxpayer
- Bankruptcy of corporations, exempt organizations and Limited Liability Companies
- Financial hardship
Taxpayers that are experiencing financial hardship can apply for Currently Not Collectible status to postpone paying tax debt. The IRS considers the taxpayer’s assets and equity, and income and expenses to judge their financial capability. According to the IRS, a hardship exists if a taxpayer is unable to pay reasonable basic living expenses such as housing, transportation, and food. Usually, the IRS accepts cases where a taxpayer has no income or assets, no equity in assets or insufficient income to pay any amount of tax debt. The IRS considers cases where the taxpayer will experience a financial crisis if forced to pay any amount of tax debt.
Accounts may be placed under CNC hardship by the IRS even if there are unfiled returns.
After receiving CNC status, interest and penalties on the tax debt amount continue to be added to the total amount. The IRS periodically reviews the financial condition of taxpayers under CNC to see if there are any improvements in their financial condition. Taxpayers need to provide documentation as proof of their financial condition. CNC can provide a good resolution opportunity for taxpayers that cannot pay any amount of tax debt and do not expect their financial condition to change anytime soon.
If taxpayers have some ability to pay any amount of tax debt, they may look for other options such as tax debt reduction under Offer in Compromise or Partial Payment Installment Agreement.