Tax debt is the worst debt you can owe because of the nature of the creditor. Your creditor is the IRS with its unusual power. For example, the IRS does not have to get a judge’s permission to collect a tax debt from you. They can show up at your house with a badge. You swear under oath and you sign under perjury. There is the ultimate threat of, shall we say, prison.
Needless to say but those extreme majors are reserved for the unlucky few. IRS tax problems can usually be solved through standard tax settlement options such as an installment agreement, offer in compromise, and currently-not-collectible. These IRS solutions offer tax relief for many taxpayers with different financial positions.
Those who have the money and assets may qualify for installment agreement only. Those who have no money or relatively less net income and assets than the tax debt may qualify for an offer in compromise. Finally there is the currently not collectible which may be ideal to those who are uniquely situated. Those who may have assets but no stream of income to support paying their back taxes may qualify, among other reasons, for the currently not collectible status.
Overview of Currently Not Collectible Program
The basis of any negotiation for the IRS debt is income and expenses and assets and liabilities. It may be helpful to state that what derives any tax solution is not how much you owe but rather, in the end, how much you can pay. That is why we always talk about your income and your expenses every month.
If you have money left over, you must put it on the table. That is part of the story. The other part of the story is your assets and liabilities. In addition to the money you will put on the table from what is left after your expenses, the IRS wants also all the money you have in from assets such as CDs, 401K’s, stocks, home equity, etc. They will take all that to the extent of the debt you owe.
When we negotiate we show them our cards. Ultimately it’s the money available for the taking and some equity here and there. That is basically the crux of our business as far as collection is concerned. Of course, as always, the devil’s in the details.
So if we are going to show them the income and expenses and what we own and what we owe, why do we have different tax solutions? The answer is that we provide the same data for everyone. It is the interpretation of the data that will dictate the nature of the solution.
As we alluded above if you have money to pay the whole tax debt, then the IRS will insist on getting the whole amount of back taxes including interest and penalty. The only tax help you are getting from them is that they will give you time to pay, say 48 months. That is an installment agreement.
If the numbers show that you can only pay so much of the total tax debt from both, what you own and from your monthly income only, they want that much then to be paid and may also over few years and that is an offer in compromise.
If you show that you have a lot of equity in the house that you live in but you are no longer making money and what you make is enough to keep you afloat then you are a good candidate for the uncollectible status.
So, the uncollectible status as we explained it so far is the status that is ideally suited for people with assets but no cash flow to pay the debt. The key word here is “ideally”. Does it mean that those people are the only category of people that will benefit from such tax resolution? The answer is no.
Difference between Currently Not Collectible and Other Programs
Generally speaking people who qualify for an offer in compromise will qualify for the uncollectible status. The opposite is not true because you could qualify for the uncollectible status but not for the offer in compromise because you may have assets that exceed your debt.
Another question is if you qualify for an offer in compromise and the uncollectible status, which one should we choose and why? Again, in general we should choose the offer in compromise every time we can.
Unlike an offer in compromise, the uncollectible status as a solution to your tax problem will not give you permanent tax relief (except when the collection statute lapses). Offer in compromise does.
When the government declares you as currently not collectible, they are in essence freezing your account in the computer and stop collection actions such as bank levies, wage garnishments or property seizure against you. They may send you annual statements to remind you of the tax debt. The meter in the IRS computer continues on ticking and thus they continue to charge you interest and penalties if applicable.
The IRS will continue to snoop around you. The minute they smell the green they will come running and resurrect your account with all the bills associated with it, that is interest and penalties. So, you have been in the uncollectible status for five years and now they receive a copy of a large sum of a 1099 that was sent to them. Now the collection army is marshaled. Now you have notices all over again, no new collection actions are instituted.
Situational Examples Ideal for Currently Not Collectible
Are there no benefits then to the uncollectible status? On the contrary, uncollectible status is a great tax relief and may be that is all you need to get rid of all your IRS tax problems. The following are situations that will be ideally suited for currently uncollectible status:
1) if you are retired and on a fixed income like social security and the government agreed to declare you uncollectible, you may have resolved your tax problem forever. In this instance the only time the IRS will bring you into their radar sphere is when you make more money. Since you only have limited income that is not expected to increase, then you will remain permanently in this status and you got yourself the greatest tax help that can be given because the IRS will ultimately close your case after the 10 yr statute of limitation.
2) If you want to buy time and stop government harassment, this is a good tax relief and excellent resolution even if it meant that you will make a lot of money in the future and that you will then have to pay your full taxes. This tax resolution protected you when you needed the protection and allowed you top pay the back taxes when you have the money, not bad.
3) When you could not benefit from the offer in compromise and you have assets that you don’t want to put on the table. Your cash flow qualifies you for the offer in compromise tax relief but you your assets do not, then we go to currently not collectible status.