The Dangers of “Currently Not Collectible” Status with the IRS

For many individuals experiencing financial hardships, the words “Currently Not Collectible” (CNC) can sound like a sigh of relief when dealing with back taxes owed to the IRS. This status means the IRS acknowledges that you can’t currently afford to pay off your debt without causing substantial financial distress. As a result, the agency will halt its collection efforts temporarily. However, before considering this as a solution, it’s crucial to understand the potential dangers and long-term implications.

Your Tax Debt Doesn’t Disappear

While the CNC status stops aggressive collection actions and gives taxpayers some breathing room, it doesn’t eliminate the tax debt. The amount owed, including interest and penalties, will continue to accrue. This means you could find yourself in a deeper financial hole in the future.

Renewed Collection Efforts

CNC is not a permanent status. The IRS will routinely review your financial situation, and if they determine that your income has increased or you can afford to make payments, they will restart their collection efforts. This might lead to wage garnishments, liens, and levies.

Evaluate your tax situation

By evaluating your tax situation, you can identify areas where you may be able to reduce your tax burden and make informed decisions about your financial future.

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Limited Time to Collect

The IRS generally has ten years from the date of assessment to collect a tax debt. While this may seem like a long time, remember that the clock doesn’t stop during the CNC period. If the debt isn’t paid off or resolved by the end of the collection statute, the IRS may become more aggressive in its collection attempts as the deadline approaches.

Public Disclosure

When the IRS labels your account as CNC due to unpaid liabilities, it could file a Notice of Federal Tax Lien. This public document alerts creditors that the government has a right to your property. Such a notice can severely impact your credit rating, making it challenging to secure loans or lines of credit.

Limitation on Assets

While under CNC status, the IRS generally expects you not to accrue any new assets or savings. If you do, the agency can argue that those funds should go towards your tax liability.

Potential for Audit

Being in CNC status can flag your account for closer review. This heightened scrutiny might increase your chances of an audit in future tax years.

Currently Not Collectible Status

While “Currently Not Collectible” status might offer immediate relief from aggressive collection activities, it’s not without risks. The accumulation of penalties and interest, potential loss of refunds, and ongoing oversight from the IRS can make this a less-than-ideal solution for many taxpayers. It’s always recommended to consult with a tax professional to understand all your options and their long-term implications. Whether it’s setting up an installment agreement, submitting an offer in compromise, or seeking other remedies, make sure you’re making an informed decision about your financial future.

Remember, while the IRS offers various programs to assist taxpayers, not all of them may be suitable for your specific situation. Engage with a tax professional to navigate the complexities and potential pitfalls of dealing with tax debt.

Don’t want to handle it yourself? Drop us a line at our Contact page or call us at (877)469-1651.

References:

• Internal Revenue Service. (2021). Topic No. 201 The Collection Process.
• Taxpayer Advocate Service. (n.d.). Currently Not Collectible.
• Dummies. (n.d.). Understanding Currently Not Collectible (CNC) Status.