Sometimes life overwhelms you and wreaks havoc on your finances. The loss of job, a serious illness or disability, divorce, the failure of a business, these are some of the common reasons I hear from people who seek help with their IRS, State and Local back tax obligations. Many people are still attempting to recover from the Great Recession of 2008 and 2009 and some many never be able to recover their financial footing. If that is the case, someone with IRS, State or local back tax debt may need time to attempt to recover without having to deal with potentially devastating collection action. Or in the case of someone who will never recover, their obligations may need to be put on permanent hold.
Fortunately, the IRS and many state and local tax agencies are willing to back off for a while to allow someone to recover. The IRS has an official designation for people who cannot pay their back tax debt at the current time. This is called “Currently Non-Collectible Status”. (“CNCS”) If someone is declared CNCS, the IRS will stop all intrusive collection efforts for a minimum of 18 months. During this time, no payments are required and no wage or bank levies or garnishments will occur. CNCS is also the first step towards getting the IRS to accept an Offer in Compromise. More on that at another time. If during this time the taxpayer is able to recover sufficiently to begin to make payments, the IRS will revoke CNCS and a reasonable payment arrangement will need to be established.
In order to be declared CNCS, you must provide proof of all household income and expenses either through an interview process with the IRS Collection Division or through the submission of a form 433A to a local Revenue Officer. If your income is barely enough to meet reasonable living expenses, with nothing left over, you can be declared CNCS. This is true even if you have equity in a home (unless you can borrow on that equity) or have funds in a retirement account.
In some cases, the tax authorities can be convinced that back tax obligations will never be paid and should therefore be written off. This can sometimes be done with state and local agencies and ultimately the IRS will write off your balance once the obligation is more than 10 years old.