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.
There is an IRS statute of limitations on collecting taxes. The IRS is limited to 10 years to collect back taxes, after that, they are barred by law from continuing collection activities against you.
CNC status allows people in financial hardship situations to defer paying their tax bill until their situation improves. For example, unemployed people often seek CNC status from the IRS.
Here’s the tricky part. If you need CNC status, you must prove to the IRS that you can’t afford to pay.
That means you’ll need to document your financial situation for the IRS.
First, the IRS will look for any nest egg that you may have, like a savings account, to pay your taxes if you don’t need it to pay for necessary living expenses.
If you don’t have any assets to pay the debt, the IRS will want you to document your average monthly income and necessary living expenses. The IRS is looking to see if you can pay with an installment agreement.
The IRS may also ask you to file a financial statement (called a Form 433) and may even require you to prove your monthly income (with paystubs and bank deposits) and monthly living expenses (with receipts).
Here’s the catch: The IRS can set limits on your expenses. For example, if your car payment is $1,200 a month, the IRS will limit it to $497.