IRS Status: Currently Not Collectible
A special program design to help people experiencing financial hardship
Individual taxpayers who owe the IRS may be eligible to defer making payments on their past due income taxes. To qualify for deferral, the person would need to have little or no money left over every month after paying essential living expenses such as rent, utilities, and groceries. The benefit is that the IRS will hold off on collecting past due taxes: they won't request that the person set up an installment agreement, and they won't try to garnish their wages or levy their bank accounts. The IRS basically ceases collection activity.
When the IRS decides that a person is suffering financial hardship, they place that person's account into a special status called "Currently Not Collectible."
Deferring tax payments sure sounds like a great idea. Especially if a person has been struggling to make ends meet and living in fear that the IRS will take what little they have. In such a situation, Currently Not Collectible status can provide much needed "breathing room" – time that the taxpayer can use to get back on their feet and figure out a way to pay off the IRS without the immediate threat of collections activity.
But just like with any good idea, it's a smart move to consider the downsides as well. The tax debt does not go away: the person will still owe the past due tax, and the balance will continue to accumulate interest and late penalties. The IRS will hold onto any future tax refunds (they call this a "refund offset"). Refunds will be kept by the IRS and applied to the outstanding balance due. The IRS may file a lien against the taxpayer's property. Called a Notice of Federal Tax Lien, this shows up on a person's credit report and put creditors on notice that an outstanding balance is owed to the IRS.
When is Currently Not Collectible a Good Option to Pursue?
Speaking as a tax practitioner, I evaluate whether a person would be a candidate for Currently Not Collectible status at the same time I evaluate their other options for dealing with outstanding tax debts. That is to say, we take a comprehensive view and calculate the client's monthly payments on an installment agreement, their settlement amount on an offer-in-compromise, and their eligibility for currently not collectible status. All three options use, roughly, the same financial data.
While situations vary and every person's circumstances are unique, there are some common scenarios where I see Currently Not Collectible as playing a positive role in helping a person get out of debt with the IRS:
- The person only has a few more years left on the 10-year statute of limitations.
- The person makes less than $84,000 per year, their living expenses fall within the IRS's guidelines, and they have little or nothing left over after paying for basic living expenses.
- The person's only income is from Social Security benefits, welfare benefits, or unemployment benefits.
- The person is unemployed and has no other source of income.
How Long Does Currently Not Collectible Status Last?
It varies. The amount of time that a person stays in Currently Not Collectible status is directly related to how much income they earn.
When the IRS approves someone for Currently Not Collectible status, the agent inputs a closing code on the taxpayer's account. That closing code basically tells the IRS's computer system when to pull the person's file for review.
Let's say Bob is 65 and has an eight-year-old tax debt. He makes $30,000 a year. After taxes are withheld from his wages, he has just enough money to pay for rent, utilities, groceries, and his monthly bus pass. Some months he has a little bit left over. Some months he just gets by. The IRS reviews his financial situation and determines he qualifies for Currently Not Collectible status. The agent working the case puts in a closing code for $36,000. When Bob starts making more money, the IRS will want to follow up with him to see if he can afford to start making monthly payments.
What the IRS is looking for is the first tax return Bob files showing total positive income of $36,000 or more.
This concept of total positive income needs a bit of explaining. Total Positive Income includes the total of all the positive values shown in the income section of the tax return. We are not looking at losses. And we are not looking at any deductions. We are looking only at positive amounts of:
- Schedule C net profits,
- Schedule F net profits,
- Distributions, and
- Other income.
(Source: Internal Revenue Manual)
So how long a person lasts in Currently Non-Collectible status depends on how quickly the person's income situation can improve.
Practice pointer: Ask the IRS what closing code they use when setting up the non-collectible status. That way you will know what income level will trigger follow-up from the IRS.
How to Go about Requesting Currently Not Collectible Status
There are four phases of this project:
- Gathering documents and getting ready
- Filling out a financial statement
- Analyzing the financial statement
- Submitting the financial statement to the IRS for their review
Step 1. Gathering Documents and Getting Ready
Here are the documents the person needs:
- Bank statements for the last three months,
- List of all assets and their market values,
- Tally of all income and monthly living expenses,
- Proof of payment for any significant out-of-pocket medical.
We also want to do some pre-checks to make sure the person is ready. (These are the same pre-checks the IRS will do, so we might as well get this out of the way, so the IRS has one less reason to say no.)
- Review the level of withholding (on wages, pensions, etc.) to make sure it's sufficient so that there will be zero balance due when the next tax return is filed.
- Review the level of estimated taxes (on self-employment, farming, or business income). We are looking for the same thing: are the estimated payments sufficient to avoid owing when the next tax return is filed.
The IRS wants to make sure the person won't be incurring any new tax debts. It's the number one rule to getting out of debt with the IRS. "No new tax debt."
- Are all tax returns filed?
The IRS wants to make sure all tax returns are filed. If there are any unfiled tax returns, the next thing the IRS wants to know is if those returns will have any balance due, or if there are refunds. Again, better to get them filed before requesting currently not collectible status than to have to explain the situation.
Step 2. Filling Out the Financial Statement
The IRS will ask the person to fill out either Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-F, Collection Information Statement (both are pdf files).
Both forms ask for similar types of financial data. Pick one and work through the form, from top to bottom.
If you’re an individual trying to solve this problem yourself: listen up. You might be thinking about hiring a tax professional to help you deal with the IRS. That's all well and good. What I'm going to tell you will now save you money and frustration. Fill out one of these forms yourself, following all the instructions. And then take that completed form, along with three months of bank statements to your first meeting with your tax professional.
I was talking with Charlie Mitchell, an enrolled agent in the greater Dallas, Texas, metroplex. He makes his clients fill out this paperwork. At the end of the day, the client must be "willing and able to do the records," Mitchell said. Getting a handle on your records and tracking income and expenses is a skill that will keep you out of tax trouble for years to come.
Here is what is involved in filling out a Form 433:
- Making a list of everything you own (bank accounts, investment accounts, retirement accounts, cars, trucks, motorcycles, boat, property, life insurance, and so forth).
- And coming up with a market value of those assets.
- Tracking how much income was made in the last three months.
- Tracking spending for the last three months.
- Reporting a three-month average of income and expenses by category.
Step 3: Analyzing the Financial Statement
Now we get to the interesting part.
The IRS has a procedure for analyzing financial statements. We can use the same procedure ourselves. The benefit is we start to understand what the IRS is looking for, and how they will see the situation. We can then use that analysis to help us decide if Currently Not Collectible is a good option for us, or if some other option would be better.
Now the IRS has published a rather thorough Financial Analysis Handbook in their Internal Revenue Manual (5.15.1). Refer to that for all the details and nuances.
What we are going to focus on here is analyzing income and expenses. There are three goals.
The first goal is to find total monthly income; total monthly necessary living expenses; and what's left over each month after basic living expenses have been paid. It reveals how much income is left over that could, potentially, be spent on making tax payments to the IRS.
I prefer to do these calculations using spreadsheet software. You could also do this on paper.
The second goal is to compare the person's monthly living expenses to what the IRS will find allowable. What do we mean by allowable? Here's an example, suppose Bob, a single person with no dependents, is paying $6,000 a month in rent. But the IRS knows that it costs, more or less, about $2,000 to rent a 1-bedroom apartment in the city where Bob lives. The IRS will only allow the $2,000 in rent expenses. Essentially, what the IRS is implying (but they won't come straight out and say it) is that Bob could move to the $2,000 a month apartment and give the $4,000 difference to the IRS each month.
Now, let's dig into the details of each of these goals.
Allowable living expenses are called the collection financial standards. There are four sets of standard living expense data:
How to work with these collection financial standards? Set up your spreadsheet or work paper like this. In one column, write down all the categories of expenses as shown on Forms 433-A or 433-F. In the second column, write down your actual expenses in each category. In a third column, write down the relevant collection financial standard for each category of expense. Then, once you have listed out all the relevant collection financial standards, look at the data and compare the two sets of numbers.
What the IRS will do is take whichever number is lower. Write down whichever number is lower, and put that in a fourth column. This will be the allowed expense for that category.
Here's another way to analyze the numbers. Are any of your actual expenses significantly larger than the relevant collection financial standard? If so, the IRS will disallow any expenses above the collection financial standard, unless you can demonstrate that the additional expense is necessary for you and your family's "health, welfare and/or production of income" (see, Internal Revenue Manual 184.108.40.206). The IRS will also expect you to provide proof of payment so they can verify the expense amounts.
The third goal is to calculate net disposable income. The math goes like this: total monthly income, minus allowable living expenses. Allowable living expenses are the lower of a person's actual expenses or the collection financial standard for each particular expense category. Using the spreadsheet or work paper, we would total all the allowable expenses, and subtract this number from total monthly income. What's left over is net disposable income. Net disposable income is what the IRS expects a person to pay towards their unpaid tax debts.
Calculating net disposable income is where the rubber meets the road. It is how the IRS figures out what a person can afford to pay towards taxes owed for previous years. If a person has one hundred dollars left over after paying necessary living expenses, then the IRS will expect the person to set up an installment agreement to pay a hundred dollars a month.
If a person is unable to pay reasonable basic living expenses, however, then a hardship situation exists (Internal Revenue Manual 220.127.116.11.9). Essentially, what this means is that monthly income is equal to or less than the necessary living expenses. In a hardship situation, the IRS can temporarily cease collection activity by placing the person's account for each tax year with an outstanding balance into currently not collectible status.
Step 4: Submitting the Financial Statement to the IRS for Their Review
After organizing your financial data, filling out the Form 433-A or 433-F, and analyzing the financial data, you determine that you might qualify for Currently Not Collectible status. The next step is to submit your paperwork to the IRS and ask them to determine if your account can be placed in Currently Not Collectible status.
The best way to start this process is to give the IRS a call. Or, if you would rather not talk to the IRS, hire a tax professional to talk to the IRS on your behalf. Have all of the following ready when you call:
- A filled out Form 433-A or Form 433-F
- 3 months of bank statements
- Proof of payment for any unusual or large expenses (for example, medical costs)
- A fax machine, in case the IRS wants you to fax them the documents
- A pen or pencil and a notepad to take notes
Individuals can call the IRS at the general hotline number of 1-800-829-1040. Tax professionals can call the special hotline for practitioners.
When calling the IRS, be prepared to sit on hold, often for a lengthy period of time. Also, be sure to take notes. In particular, note the time and date of your call, the badge number of the IRS agent you spoke to, what was discussed, and the outcome of the call, such as the IRS's decision or any follow-up items.
If you don't qualify for Currently Not Collectible status, it may be advantageous to ask the IRS for an installment agreement based on your ability to pay. It is often a good back up plan, and so be prepared to discuss whether that is doable for you.
For further information about Currently Not Collectible status and general information on dealing with unpaid taxes, see:
- Temporarily Delay the Collection Process (IRS.gov)
- Currently Not Collectible (Internal Revenue Manual 5.16.1)
- Financial Analysis Handbook (Internal Revenue Manual 5.15.1)
- Policy Statements for Collecting Process Activities (Internal Revenue Manual 1.2.14), especially Policy Statement 5-71.
- Collection Procedures for Taxpayers Filing and/or Paying Late (IRS.gov)
- The Balance Due Collection Process (IRS.gov)
- Your Rights as a Taxpayer (Publication 1, IRS.gov, pdf)