IRS Hardship – Rules & How to Apply for Uncollectible Status
If you can’t pay your tax liability, you may want to apply for currently not collectible (CNC) status, also known as IRS hardship. To qualify, you must have very few assets, and your income must only cover your necessary living expenses.
If you qualify for the CNC tax program for financial hardship reasons, the IRS temporarily pauses all collection activity on your account. However, you still owe the IRS money and interest continues to accrue on your tax amount owed. If you owe more than $10,000, a federal tax lien will show on your credit report. That stays in place until you pay the liability or it expires. That can make it difficult to get loans.
How to Apply for Uncollectible Status From the IRS
To get uncollectible status from the IRS, you must prove that you can’t afford to pay your tax bill. You need to show the IRS that you have no assets you could sell (some caveats) to cover the liability and that your income only covers essential expenses.
Prior to requesting currently not collectible status you should do the following first:
- File all past due tax returns for the years you had a filing requirement.
- Continue to file any tax returns that come due, even if you cannot pay. Filing current taxes will prevent the failure to file penalty which is much higher than the failure to pay penalty.
- Get together your financial information that will verify your income and expenses that the IRS will need.
To fill out this form, you need copies of all your financial information. That includes your paychecks, income and expense reports from your business, and statements from your retirement account. You also need details on loans such as mortgages, car loans, and credit cards. After you finish filling out the form, make copies of all this information. You need to include the copies with your application. Don’t send originals—the IRS can lose things.
If you are disabled, you need to include proof of that with your application. That helps to show the IRS that you can’t work or can only work part-time. Medical bills and doctor’s’ notes help.
After you have gathered the information and filled out the form, send it to the IRS. Then, wait for a response.
Spending Limits for Uncollectible Status
The IRS has guidelines in place for what it deems to be acceptable monthly expenses. The IRS sets the allowances for food, clothing, and other items on a national level. For example, as of 2017, the IRS allows the following expenses for a single person per month:
Housekeeping Supplies: $32
Apparel and Services: $83
Personal Care Products and Services: $36
These amounts increase for families with two, three, four, or more people. For instance, the IRS believes that a family of five needs to spend $1,975 on those expenses every month. However, the amounts for housing and transportation vary based your state and county.
For example, if you are a single person living in Denver County, Colorado, the IRS believes that you need a minimum of $1,577 for housing and utilities each month. However, if you are a family of five living in Freeborn County, Minnesota, the IRS only allots you $1,503 for housing and utilities. These differences account for the different costs of living throughout the country.
Regardless of where you live, the limits tend to be quite low. If you are spending more than the IRS believes is necessary, you may not be able to get non collectible status. However, you can still get approved for the CNC program even if you spend more than the allowed amounts if you can show you would be experiencing hardship even if you were spending the allowable amounts. The IRS does not count expenses such as private school tuition, college tuition, and expensive car payments as necessary expenses.
If you can cut down on your expenses, sell some assets, or move to a cheaper home, the IRS will demand payment. To increase your chances of approval, you should work with a tax professional.
What Happens When the IRS Labels Your Account as Uncollectible
When your account has an uncollectible label, the IRS continues to monitor your financial situation. If it improves, the IRS will demand payment. The IRS may also request updated financial statements on a regular basis. If you fail to file returns or make required tax payments, you can lose your uncollectible status.
While you have uncollectible status, the clock is still running on the statute of limitations. Generally, after you file, tax liability expires 10 years after your due date. If you don’t pay the taxes during this window, the IRS loses the right to collect it. Note that the clock doesn’t start until you file your return.
Many people who have been declared uncollectible end up owing nothing after the statute of limitations passes on their tax liability. To get help applying for uncollectible status, contact us. We can set you up with a free consultation with one of our tax resolution specialists. We can also help you find other options if the CNC program is not the best fit for you.
Help Proving Financial Hardship & Info
File Back Taxes
File back taxes if you still have returns outstanding. You will be required to file all returns before you can receive any type of settlement with the IRS. The sooner you file the better to eliminate more penalties and interest.
Eliminating Penalties through Abatement
Eliminate your penalties with abatement if you have a legitimate excuse for not meeting the filing deadline.
IRS Statute of Limitations
Generally, the statute of limitations on IRS taxes is 10 years. With CNC status there is a chance statutes can expire.
Options When You Can’t Pay Taxes On Time
Your options if you can’t pay taxes that are due when tax time rolls around. Regardless of you having the money or not, taxes are still do, and you should know your options if you can’t pay.