Owe Money to the IRS But Can't Pay? You May Be Eligible for Help
"Currently Not Collectible" Status Can Give You Some Breathing Room
You might be eligible to defer making payments to the IRS on past-due income taxes if you owe a tax debt and simply can't pay. You must have little or no money left over every month after paying essential living expenses such as rent, utilities, and groceries to qualify for a deferral. The IRS will place your account in "Currently Not Collectible" (CNC) status and will hold off on collecting past due taxes from you.
You won't be subjected to the usual collection efforts. They won't garnish your wages or levy your bank accounts, and they won't require that you set up an installment agreement.
As the name suggests, the IRS acknowledges that it couldn't squeeze any money out of you if it tried, at least not without rendering you homeless.
Currently Not Collectible status is reported and recorded on IRS Form 53. It's often referred to in tax lingo as "53-ing" the taxpayer's account.
The Pros and Cons of Currently Not Collectible Status
Deferring tax payments sounds great, especially if you've been struggling to make ends meet. CNC status can provide much needed breathing room—time that you can use to get back on your feet and figure out a way to pay off the IRS without the immediate threat of collections activity.
But consider the downsides as well:
- The tax debt does not go away—you'll still owe the past-due tax, and the balance you owe will continue to accumulate interest and late penalties.
- The IRS will hold onto any tax refunds you might be entitled to in future years. It will apply them to your outstanding balance due in a process called a "refund offset."
- The IRS might also file a Notice of Federal Tax Lien against your property which shows up on your credit report and puts creditors on notice that you owe an outstanding balance to the IRS.
When Is Currently Not Collectible a Good Option?
A tax professional can help you evaluate whether you're a good candidate for Currently Not Collectible status, as well as suggest other options for dealing with outstanding tax debts. They'll calculate the monthly payments you'd be required to make on an installment agreement, the likely settlement amount if you were to ask for an offer-in-compromise instead, and review your eligibility for CNC status.
All three options use roughly the same financial data.
CNC Qualifying Requirements
Every person's circumstances are unique, but CNC status can usually help you get out of debt with the IRS if you meet one or more of the following requirements:
- You only have a few more years left on the 10-year statute of limitations the IRS has to collect.
- You make less than $84,000 per year, your living expenses fall within the IRS's guidelines, and you have little or no money left over after paying for basic living expenses.
- Your only income is from Social Security benefits, welfare benefits, or unemployment benefits.
- You are unemployed and have no other source of income.
How Long Does CNC Status Last?
The agent inputs a "closing code" on a taxpayer's account when the IRS approves someone for Currently Not Collectible status. The code tells the IRS when to pull that taxpayer's file for review to determine if circumstances have changed.
Ask the IRS what closing code they use when setting up your non-collectible status so you'll know what income level will trigger follow-up from the IRS and when.
The amount of time you remain in Currently Not Collectible status is directly related to how much income you earn and how quickly your income situation improves.
Bob is 65 years old and he has an eight-year-old tax debt. He makes $30,000 a year. He has just enough money to pay for rent, utilities, groceries, and his monthly bus pass after taxes are withheld from his wages.
The IRS reviews his financial situation and determines that he qualifies for CNC status. The agent working the case puts in a closing code for $36,000. The IRS will follow up with Bob to see if he can afford to start making monthly payments on an installment agreement when and if Bob files a future tax return showing "total positive income" of $36,000 or more.
Positive Income Rules
Total positive income includes the total of all the positive values shown in the income section of the tax return. It doesn't factor in losses and deductions. According to the Internal Revenue Manual, positive amounts of the following sources of income are taken into consideration:
Earned income from holding down a regular job or running a small business as a sole proprietor isn't indicative of your total positive income. Any unearned income you might have counts as well.
Rules for Allowable Expenses
Allowable living expenses are called the "collection financial standards." There are four sets of standard living expense data:
- Food, clothing, and other household-type expenses
- Out-of-pocket health care expenses
- Housing and utilities
Compare your monthly living expenses to IRS allowable expenses. In another example, let's say Jan, a single person with no dependents, pays $6,000 a month in rent. But the IRS knows it typically costs about $2,000 to rent a one-bedroom apartment in the city where Jan lives. The IRS will only allow $2,000 in rent expenses regardless of how much Jan actually spends.
You generally cannot include extravagant or discretionary expenses, even if they're far less than what other people spend. Your cable service might be limited to basic cable, not the streaming service with unlimited movies you pay for. And you can probably forget about including that vacation you take every holiday season, no matter how carefully you budget it and cut corners.
How to Request Currently Not Collectible Status
There are four steps to making a CNC request. Gather your documents and do a pre-check, then fill out a financial statement. Analyze the financial statement and submit it to the IRS for review.
No. 1: Gather Documents and Do a Precheck
Make sure you have the following documents. Order copies if you're missing any.
- Bank statements for the last three months
- List of all assets and their market values
- Tally of all income and monthly living expenses, with copies of bills and receipts
- Proof of payment for any significant out-of-pocket medical expenses
Prechecking includes a review your level of withholding on wages and pension pay so you won't owe a balance when your next tax return is filed. You'll also want to review the level of estimated taxes on self-employment, farming, or business income. Are these estimated payments sufficient to avoid owing when your next tax return is filed?
The IRS wants to make sure you won't be incurring any additional tax debts going forward. It's the No. 1 rule to getting out of debt with the IRS.
The IRS also wants to make sure all your tax returns are filed. They will want to know if any as-yet-unfiled returns will have any balances due or if they'll result in refunds.
No. 2: Fill Out the Financial Statement
Complete either Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-F, Collection Information Statement. Both ask for similar types of financial data. Pick one and work through it from top to bottom.
Fill out one of these forms and take it with you, along with three months of bank statements, if you meet with and plan to hire a tax professional for help.
Filling out Form 433 requires that you:
- Make a list of everything you own, including bank accounts, investment accounts, retirement accounts, cars, trucks, motorcycles, boats, real property, and life insurance.
- Estimate market value for those assets.
- Track how much income you made in the last three months.
- Track your spending for the last three months.
- Report a three-month average of income and expenses by category.
No. 3: Analyze the Financial Statement
Calculate your monthly income, necessary living expenses, and what's left over each month after paying basic living expenses. This is the amount of money that you could potentially remit to the IRS for tax payments.
Set up a spreadsheet or work paper with four columns. In one column, write down all the categories of expenses as shown on Forms 433-A or 433-F. Write down your actual expenses in each category in the second column. Enter the relevant collection financial standard for each category of expense in the third column. Finally, note the lower number from column two and column three in the fourth column.
The IRS will take whichever number is lower as the allowed expense for each category.
The IRS will disallow any expenses significantly that are larger than the relevant 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."
The IRS will also expect you to provide proof of payment so they can verify the expense amounts.
Finally, calculate net disposable income by taking total monthly income minus allowable living expenses. Subtract all allowable expenses from your total monthly income to calculate what the IRS expects you to pay toward your unpaid tax debts.
The IRS will expect you to set up an installment agreement to pay $100 a month if you have $100 left over after paying necessary living expenses.
Step 4: Submit the Financial Statement to the IRS
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 begin this process is to give the IRS a call at the general hotline number: 1-800-829-1040. You can hire a tax professional to talk to the IRS on your behalf if you would rather not talk to the IRS yourself. Have all of the following ready when you call:
- Completed Form 433-A or Form 433-F
- Three months of bank statements
- Proof of payment for any unusual or large expenses such as medical costs
- Access to fax machine in case the IRS wants you to fax them the documents
- A notepad or tablet to take notes
Note the time and the date of your call, the badge number of the IRS agent you spoke with, what was discussed, and the outcome of the call, such as the IRS's decision or any follow-up information.
The IRS Definition of "Hardship"
The IRS considers it to be a hardship situation and will place your account into Currently Not Collectible status if your monthly income is equal to or less than your necessary living expenses.
According to the IRS, "significant hardship" means that paying anything toward your tax debt at this particular point in time would result in "serious privation." You'd literally be doing without some of the necessities of life. It does not mean that living without making some expenditures would be unpleasant or inconvenient.
If You Don't Qualify
You can still ask the IRS for an installment agreement based on your ability to pay If you don't qualify for CNC status. It's a good backup plan, so be prepared to discuss whether it's 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)
- Collection Procedures for Taxpayers Filing and/or Paying Late (IRS.gov)
- The Collection Process (IRS.gov)
- Your Rights as a Taxpayer (Publication 1, IRS.gov)
Internal Revenue Service. "The IRS Collection Process Publication 954," Page 3. Accessed Nov. 6, 2019.
Internal Revenue Service. "5.16.1 Currently Not Collectible." Accessed Nov. 6, 2019.
Internal Revenue Service. "5.15.1 Financial Analysis Handbook," Accessed Nov. 7, 2019.
Philip C. Cook Low-Income Taxpayer Clinic, Georgia State University. "Currently Not Collectible." Accessed Nov. 6, 2019.