Pros and Cons of Receiving "Currently Not Collectible" Status on Your Taxes

Pros and Cons of Receiving "Currently Not Collectible" Status on Your Taxes

• Oct 15, 2022

When you fall behind on your taxes, dealing with the collection actions can be extremely stressful—especially if you know there’s nothing you can currently do to settle that tax debt. One option for dealing with this problem is to apply to have your account with the IRS set to “Currently Not Collectible,” or CNC. What is CNC status, and what are the pros and cons of making this request for your tax debt? Keep reading to find out more.

What Is CNC Status?

As the name implies, “Currently Not Collectible” status establishes with the IRS that they are currently unable to collect on your tax debt. This status is only available to those currently under financial hardship, who don’t have liquid assets beyond what they need to cover their basic monthly expenses. To qualify for this account status, you’ll need to demonstrate to the IRS that you can’t reasonably be expected to pay your tax debt while also meeting your living expenses. If the IRS agrees, your request will be approved, and the CNC status on your account will stop collection actions from the IRS until such a time that your financial situation changes.

What Are the Benefits of CNC Status?

The key benefit of setting your account to “Currently Not Collectible” is that all collection actions from the IRS will stop. This includes overdue tax notices in the mail, collection phone calls, wage garnishment, bank account levies, and more. Essentially, you’ll stop being hassled about the debt, and you’ll be able to keep your money in the bank without fear of the IRS taking it out from under your nose.

For many people, this reprieve can provide some much needed relief to take a breath, reorient themselves, and start to get their finances back in order so that they can pay back their taxes. When you’re not living in fear of having your bank account drained or of being unable to pay your builds due to garnished paychecks, you can work towards settling your tax debt in your own way.

What Are the Drawbacks of CNC Status?

While having those collection actions stopped is certainly a big benefit, it’s important to be aware that that doesn’t mean your tax debt is erased. In fact, not only is your debt still active, but it will also be accumulating fees and interest throughout the time that your account is in CNC status. While setting your account to “Currently Not Collectible” doesn’t directly add anything to your debt, continuing to not pay anything towards that debt does result in you owing more to the IRS over time.

The IRS also has the right to impose financial restrictions on your budget. If your spending exceeds those limitations, this may indicate to the IRS that you now have more liquid funds available to you, and collection actions will be reinstated. Bear in mind that, regardless of your spending, CNC status does not last forever. The IRS will be reviewing your financial situation annually, and if the IRS determine you’re once again capable of paying on your debts, they’ll begin collecting again. Any tax refunds that you qualify for while in CNC status will also be forfeited to the IRS.

Finally, the IRS will also typically file a Notice of Federal Tax Lien on your property after the CNC has been negotiated (if they have not placed a lien on the property already. A federal tax lien has a negative impact on your credit score and can hinder your ability to refinance or qualify for a loan. Additionally, if you try to sell your home while there is a federal tax lien on the property, all profits will go towards the IRS debt you owe.

Is CNC Status Right for You?

Now that you have a better understanding of what CNC is, and its pros and cons, you can determine whether or not this option is right for you. If you’re experiencing financial hardships and simply want a reprieve from collection actions while you sort out how to pay your debt, then this status can give you that relief.

There are also many other options available to you for tax settlement with the IRS, and the professional at the IRS Advocates can help you. Contact us today to schedule a consultation. We’ll review your tax situation and finances, and provide you with our expert recommendation on which tax settlement option is best for you.