IRS Hardship Requirements to Qualify for IRS Uncollectible Status
To be declared uncollectible by the IRS or currently not collectible (CNC), you will have to prove to the IRS that if they were to collect taxes owed to them, it would create an unfair economic hardship. The IRS will consider each person on a case by case basis. The following are some questions to ask yourself. If you answer no to any of these, you may be a good candidate for being declared uncollectible.
If the IRS were to collect taxes owed from you would you be able to:
- Provide food for yourself?
- Pay your mortgage or rent?
- Keep retaining utilities?
- Obtain transportation to and from work?
- Keep your job?
- Obtain necessary medical treatments and medications needed?
- Obtain a reasonable amount of clothing?
- Not lose educational opportunities?
Even if you answered no to any of the questions above, it doesn’t mean you qualify for a CNC. You may have lavish expenses or expenses the IRS doesn’t consider necessary or allow. For example, credit card payments are usually not allowed. Therefore, you may have less at the end of each month then the IRS calculates.
CNC Rule of Thumb for Qualifying
Usually, if your income is less than the IRS’s allowable expenses, the IRS will qualify you as Status 53 or uncollectible. Filing compliance is not required but recommended. Exceptions to the filing requirement rule have been made as in the case of Vinatieri v. Commissioner of Internal Revenue, 133 T.C. 392.
In some cases, the IRS will not approve a CNC request if the taxpayer has not resolved the issue as to why they fell behind. For example, if a taxpayer does not have his or her employer withhold enough taxes from their paycheck, the IRS will require the taxpayer to adjust withholdings before approving a CNC. In the case of a self-employed taxpayer, the IRS usually wants the taxpayer compliant with estimated tax payments for the current year before placing the taxpayer on a CNC status.
Depending on your tax debt amount, the IRS may ask you to detail your financial situation before placing your account on a CNC status. The IRS will then compare your actual expenses to the allowable monthly living expenses to determine what you can pay, with any access to equity in assets taken into consideration. To review your financial state, IRS may request you complete a Collection Information Statement (CIS).
Collection Information Statement (May Be Required)
A collection information statement is an IRS form that details your monthly income, monthly expenses, assets, and liabilities. In most cases, if the IRS does request a CIS, it will be IRS form 433-F. In some cases, a revenue officer and other IRS personnel may require a 433-A, which is a more extended version of Form 433-F. This form helps you and the IRS calculate your actual expenses and your total allowable expenses based on IRS Collection Financial Standards.
Collection Financial Standards – Allowable Monthly Living Expenses
The IRS determines your ability to pay back taxes by comparing your actual living expenses to its Collection Financial Standards for costs deemed necessary by the IRS. Necessary expenses are those essential to you or your family’s health and welfare. As you complete the CIS, you will need to fill out your actual monthly living expenditures and the amounts the IRS allows for each category. Here are the various types of allowable expenses:
National Standards for Food and Clothing
The IRS has National Standards for food, clothing, housekeeping supplies, apparel and services, personal care products and services, and miscellaneous expenditures. Your family size determines the allowable monthly expense for each category. As of March 30th, 2020, here are the updated monthly living expenses.
The IRS will allow you the monthly standard in each category, even if you spend less. However, if you are above the IRS standard, you will have to request an exception.
National Standards for Out-of-Pocket Health Care Expenses
The IRS has National Standards for out of pocket health care. Out of pocket health care expenses includes monthly expenses for prescription drugs, medical care (no elective procedures), medical supplies, including eyeglasses and contact lenses. This expense category does not pertain to health insurance. The IRS allows $56 a month for the taxpayer and each dependent. For taxpayers or dependents over 65 years old, the monthly allowable expense is $125.
The IRS will allow you to take the standard, regardless of what you spend per month in this category.
Local Standards for Housing and Utilities
The IRS has “housing and utilities” standards. Housing and utilities pertain to mortgage payments or rent, property taxes, insurance, water, maintenance, interest, gas, electric, heating oil, cell phone service, cable, and internet. The allowable monthly expense for housing and utilities is determined by what county you live in (primary residence) and the size of your family. You can find updated 2020 allowable living expenses for housing and utilities here.
Housing and utilities are one monthly number. Sometimes, if you are above the IRS standard, the IRS may make an exception.
Local Standards for Transportation
The IRS also sets allowable transportation costs on a monthly basis. Transportation includes a national ownership standard (lease or loan payment) and a local operating standard (determined by the region of the country). The ownership and monthly operating cost you are allowed is the lesser of what you spend or the IRS allowable amount. The only exception to this rule is public transportation; the IRS allows the standard of $224 a month (regardless of what you spend). If you have a car and use public transit, the IRS may permit both expenses if you can prove them necessary.
Operating costs include maintenance, inspections, registration, insurance, repairs, parking, and tolls. You can see the 2020 IRS transportation standards here.
Health Insurance and Other Expenses
The IRS will allow the actual amount you pay each month for health insurance. Furthermore, the IRS also considers child support and student loans allowable expenses. Usually, this is not the case with credit card payments (though exceptions happen).
Other General Qualifying Reasons
The IRS will place a taxpayer in uncollectible status for a variety of reasons. As discussed above, if the taxpayer can prove paying back taxes creates an economic hardship, then the IRS will place the account in a CNC status. There are other reasons why the IRS may approve a CNC status including but not limited to:
- An exempt organization, corporation, or LLC (if LLC is liable), liquidated in bankruptcy
- A taxpayer dies, and there is no collection potential from the decedent or estate
- An exempt organization, LLC or corporation is in business and current but cannot pay back taxes
- IRS cannot reach the taxpayer, even with knowledge of their address, the IRS cannot enforce collections
- The statute of limitation on collections expired in part or completely
- In international cases, revenue officers may issue a CNC if the taxpayer is in a foreign country and it cannot collect
- The IRS cannot locate the taxpayer or his or her assets
- The assessment partially expired before the IRS issued it
See IRM 5.16.1, for more information and qualifying reasons.
It is a good idea to gather supporting documentation for your CNC request to the IRS. For example, organize copies of documents that support your expenses, income, assets, and liabilities. The IRS may not request the supporting documentation. However, having it readily available can make the process smoother.
Only a small percentage of people qualify for this type of relief. Tax return compliance is usually required to obtain a CNC Status. A taxpayer with less than $25 in disposable income per month (monthly income minus allowable IRS monthly expenses) is an excellent candidate assuming they don’t have access to equity in assets (with exceptions).
Work a tax professional to ensure you avoid any possible pitfalls. For example, a licensed professional can help you complete the CIS correctly, maximize, and capture all allowable expenses. Moreover, it helps to have someone on your side showing the IRS why you may need an exception for a particular living expense. Finally, a tax professional may recommend a more beneficial settlement or agreement with the IRS. For example, an Offer In Compromise may be a better solution.