Would the IRS consider me ‘uncollectible’?

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In my Middleburg, FL practice I find that people who owe the IRS have one big question: What happens if I can’t pay? Good news! You could be put into what is known as ‘uncollectible status’ or ‘CNC (Currently Not Collectible)’ and the IRS will stop collection enforcement action for now but will check in with you every year or so to see if you’re still uncollectible until the statute of limitations runs out on the tax debt. Sounds perfect, right?

It can be but there are a lot of factors involved in determining if you qualify or if it is the best course of action for your situation.

1)      The IRS’ idea of whether you can afford to pay the debt and yours are probably very different. There is an analysis that you must go through showing your monthly income, monthly allowable expenses, and your equity in assets are not enough to pay the debt. The IRS has a list of various expenses and they’ve determined how much is an acceptable amount to spend on each expense for the size of your household. That is the amount you’re allowed whether that is what you actually spend or not. Essentially, they want to see if you were to reduce your expenses to minimum standards whether you would still be unable to afford to pay the debt or not. In addition, if you have equity in assets, such as your house, that could pay the debt, they expect you to get an equity loan or sell your asset and pay the debt with those proceeds.

2)      It is critical to know how much time is left on the statute of limitations before selecting this option. If there isn’t much time left and you meet the calculations for uncollectible status mentioned in item 1, then being declared uncollectible until the time runs out might be the best option. If you still have most of the 10 years left on the statute, an offer-in-compromise may be a better solution.

3)      Nearly all collection options, such as offers-in-compromise, require you to be ‘in compliance’ first. This means that you’ve filed all tax returns that are due and are paying your taxes for the current year in a manner that will result in all taxes being paid when your current year tax return does get filed. For self employed people, this means that you’re making the required quarterly estimated tax payments. For W2 employees, it means that you’re having enough withholding out of your paychecks. If, for some reason, you cannot get in compliance right this minute, but you’ve got the IRS threatening to levy your bank accounts, being declared ‘uncollectible’ can buy you some time to get in compliance so that you can file an offer-in-compromise.

If you have any questions about whether you qualify to be uncollectible or have any other tax questions, please contact my Middleburg office at 904-600-3450.

Angela Yonge
Enrolled Agent
Acorn Bookkeeping & Tax, LLC
904-600-3450
Location: Middleburg, FL 32068, USA

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