There are many options to resolve an unpaid tax liability – you can agree with the IRS to make monthly installment payments, reach a settlement with an offer in compromise, eliminate the taxes in bankruptcy, or have the IRS place your account in currently not collectible status.
Let’s focus on currently not collectible.
Currently not collectible status occurs when the IRS agrees that you cannot afford to repay the debt, and doing so would create an economic hardship on you. It is forbearance by the IRS, a break from enforcement that can last years.
To obtain currently not collectible status, a financial statement must be provided to the IRS listing your household income and monthly living expenses. If the IRS agrees that – after paying expenses like rent, a car payment or medical expenses – you have no money left to pay them, they will mark your account as uncollectible.
Yes, the IRS will take a back seat to your necessary living expenses, but the expenses have to be reasonable for the IRS to consider you to be in hardship. The IRS applies internal expense guidelines that limit your living expenses – for example, car payments are capped at $517/month; housing and utilities for a family of four in Hamilton County, Ohio are capped at $1,910/month; food, clothing and supplies for a family of four is limited to $1,450; no allowance is usually provided for credit card payments in your budget. The IRS calls this Collection Financial Standards.
On the asset side, the IRS will consider you in hardship if your seizing your assets would either not result in any money paid (i.e, no equity in your property) or doing so would create a hardship (seizing your car means you cannot get to work, go to the grocery store, etc.).
If, after applying the IRS expense guidelines (Collection Financial Standards) it can be shown that there is no money left to pay the IRS and doing so would put you in a hardship to pay reasonable living expenses – food, rent, gas, car payment, child support, day care – and seizing your assets would also create a hardship – the IRS will place your account in currently not collectible status and, yes, leave you alone.
The IRS sends a letter out confirming you are uncollectible and that they will not bother you. This is IRS Letter 4223 – at the top, in bold print, it has the words “Case Closed – Currently Not Collectible.”
The first two lines of the IRS uncollectible letter tell you everything: “We have temporarily closed your collection case for the tax types and periods listed below. We have determined that you do not have the ability to pay the money you owe at this time.”
The IRS’s authority for marking an account as uncollectible can be found in IRS Policy Statement 5-71, which states that (1) if, after taking all the steps in the collection process it is determined that an account receivable is currently not collectible, it should be so reported in order to remove it from active inventory (2) a hardship exists if the levy action prevents the taxpayer from meeting necessary living expenses. Internal Revenue Manual 5.16.1 has comprehensive instructions for the IRS marking accounts as uncollectible.
Internally, the IRS will make a notation in their computer database that your account is currently uncollectible. In addition to Letter 4223, IRS account transcripts can be obtained with a line item reading “Case Currently Not Collectible.”
Uncollectible is a great option to combine with the limitations on how long the IRS can collect from you – the IRS has 10 years to collect a debt, starting from the date you first owed them (i.e., filed the return). An uncollectible determination can last for years – as long as you’re in hardship, allowing you to live uninterrupted by the IRS debt and having time lapse to your benefit. The IRS can be fair to those who truly cannot afford to repay taxes from past mistakes.
Proving to the IRS that you qualify for hardship status and receiving IRS Letter 4223 – Case Closed – Currently Not Collectible, can be the beginning of the end to your tax problems.