Among the various tax relief options available to individual taxpayers, filing for currently non-collectible status (CNC) is one of the most confusing and difficult options. The process is even more difficult if you’re doing it without the help of a tax lawyer. Yet, currently non-collectible status can dramatically improve finances and secure relief from IRS collections for those suffering extreme financial hardship. To help taxpayers learn more about this tax relief option, we’ll identify and correct common misconceptions surrounding currently non-collectible status.
Misconception #1: The IRS can’t touch your property if you’re under currently non-collectible
One common misconception regarding this tax relief option is that the IRS can’t touch your property if you’re under currently non-collectible status. There is some truth to this, but there’s also more nuance involved. It is correct to say that once the IRS files a taxpayer under non-collectible status, all efforts to collect the tax cease. This means that the threat of levy is suspended for the time being. The IRS will also cease demand letters and asking you to pay your tax debt.
On the other hand, the IRS is not precluded from filing a lien on your property. A lien is different from a levy. A lien is merely a claim over a property without touching it, while a levy involves taking property and using it to pay your tax bill. Think of a tax lien as the government saying, ‘I get first dibs on this property when the time comes.’ The property still stays with you, and in most instances, you can still use it. However, a lien will affect your credit rating, so if you’re planning to take a loan to pay off your tax debt, it might be more difficult for you.
Misconception #2: The debt will go away if you get approved for non-collectible status.
This statement needs more context. There is a possibility that your debt will be released if you’re under non-collectible status, but it’s not automatic. It also involves a long and difficult process. When the IRS files your account under non-collectible status it’s a temporary reprieve from the pressure of paying your tax debt. It’s not intended to be a permanent situation. In fact, interest and penalties will continue to run while you’re under non-collectible status.
So, what did we mean when we said there’s a possibility that your debt will be released? This will only happen if the statute of limitations runs out while the taxpayer is under non-collectible status. The statute of limitations refers to the period within which the IRS must collect your tax. For a tax debt owed to the IRS, the statute of limitations is 10 years. That means that the taxpayer must suffer financial hardship for at least ten years for the debt to expire. That’s a long time to be under financial hardship. An offer in compromise or installment plan can be a better option than just waiting for the debt to expire.
Misconception #3: Currently Non-Collectible Status lasts for as long as you need it.
This tax relief option lasts only for one year, after which the IRS will reevaluate your situation. This reevaluation will determine whether your financial status has improved and you can resume paying your tax debt. If your financial status remains unchanged or takes a turn for the worse, then the IRS can extend your CNC status for another year. The period is even shorter for tax debts owed to the California Franchise and Tax Board (FTB). The FTB reevaluates the taxpayer’s financial situation every six, nine, and twelve months