Having an outstanding obligation with the Internal Revenue Service (IRS) and being unable to propose an acceptable resolution to satisfy that obligation is an intimidating scenario for any taxpayer. The IRS will entertain a variety of solutions to resolve an obligation, including Offers in Compromise and Installment Agreements, but, sometimes, the taxpayer simply cannot afford these options. What happens then?
The taxpayer should continue communicating with the IRS. Under the right circumstances, the IRS will determine that a taxpayer's account is “currently not collectible.” This determination allows the IRS to “shelve” the taxpayer's account for a limited period of time, often two years. While the IRS will most likely file or have already filed a lien before “shelving” the account, during the “not collectible” period, the IRS will not take any collection action, like levying bank accounts or wages. Unfortunately, this determination does not stop the addition of interest and penalties.
This relief from IRS enforcement gives the taxpayer time to reorganize his or her financial matters, reduce expenses, and increase income, to better position themselves for an Offer in Compromise or an Installment Agreement when the case is sent back to the field. Unfortunately, even this additional time may not be enough to make a difference. In those cases, when the IRS checks back with the taxpayer after two years, it may again determine that the account is currently not collectible. These follow-up determinations will continue until the expiration of the statute of limitations on collection, that being 10 years from the date the taxes were originally assessed, subject to extension. When the statute of limitations expires, the taxpayer will be relieved from all collection activity.
Another benefit of an account being classified as currently not collectible is that it may provide sufficient time for taxes to become dischargable in bankruptcy. For more information about discharging taxes in bankruptcy, see our earlier article on the topic.
There are a variety of situations that will encourage the IRS to classify a taxpayer's account as currently not collectible. One of these situations is when IRS enforcement action would cause an undue hardship the taxpayer's household. To prove an undue hardship, the taxpayer must demonstrate to the IRS that a monthly payment to the IRS will make him or her unable to meet reasonable and necessary living expenses. The IRS will determine whether a hardship exists by conducting a financial analysis of his or her situation. Even though the taxpayer may believe he or she does not have any excess income, the IRS's financial analysis may show otherwise.
No matter what grounds the IRS uses to determine that a taxpayer's account is currently not collectible, this determination can be helpful. Even though it is a temporary remedy, it can facilitate a long-term resolution. With this determination, the taxpayer will have the time he or she needs to find an appropriate solution to their outstanding obligations.