Owe Back Taxes? Should You Request Uncollectible Status?

According to Statista, 25 percent of people with disabilities live in poverty, contrasting with 12 percent of the general population. Those receiving Social Security Disability Insurance (SSDI) receive a low fixed income, averaging $1,483 per month.

When individuals with disabilities and their families experience financial difficulties, they can find themselves owing past-due federal taxes they cannot afford to pay.

The Internal Revenue Service (IRS) estimated that Americans owed approximately $114 billion in back taxes, penalties, and interest in 2020.

Consequences of Not Paying Taxes

Unpaid taxes accrue interest up to 25 percent. There is an additional penalty for failing to file a tax return. Those who file their tax return but still need to pay can expect to receive a letter from the IRS detailing the amount owed.

Property owners who owe the IRS $10,000 or more could face federal liens on their property. If they sell their home, the government will take some of the proceeds to repay taxes. Having a lien on the property can make it difficult to refinance a loan.

The IRS can also attempt collections through wage garnishment, bank levies, and property seizure.

Several options exist for those who cannot afford to pay their taxes, including payment plans and Currently Not Collectible (CNC) status.

Payment Plans

The IRS offers payment plans to qualifying individuals, allowing them to repay owed taxes over time.

• Long-term payment plans, or installment agreements, are open to those owing $50,000 or less in combined tax, penalties, and interest who have filed all required returns.
  
  For example, someone with $6,000 in back taxes could make monthly payments of around $100.
   
• Short-term payment plans are an option for those who owe less than $100,000 in combined tax, penalties, and interest.

Currently Not Collectible Status

Sometimes, people are financially unable to pay their taxes and cannot afford a payment plan. These individuals can receive Currently Not Collectible status with the IRS. Once they have CNC status, they do not have to pay their past-due income taxes.

Obtaining CNC status requires showing the following:

• After paying your monthly living expenses, you have no surplus income.
• You have no significant additional assets.

How Currently Not Collectible Status Works

When you are on CNC status, the IRS will not try to collect from you. It will not take your assets and income to satisfy unpaid taxes. The IRS will not require you to set up a payment plan.

While Currently Not Collectable status can give you a respite before the IRS resumes collection activity, your debt persists, and interest and late penalties will continue to accrue. In what’s known as “tax refund offset,” the IRS holds your tax refunds until you satisfy your balance. The IRS may still place a lien against your property.

Past-due taxes over 10 years old are time-barred. You are no longer responsible for repaying the IRS if you remain on CRC status that long.

Requesting Currently Not Collectible Status

Before applying for CNC status, prepare a budget. An established budget will help you show you have no income to pay back taxes.

The IRS may request financial information to assess your income and expenses and determine whether you could sell assets or get a loan to pay taxes. As part of this process, the IRS may also ask you to file any past-due tax returns.

Before the IRS makes a decision, it may ask you to complete certain forms to provide information about your financial situation, including your assets:

• Form 433-A Collection Information Statement for Wage Earners and Self-Employed Individuals
• Form 433-F Collection Information Statement
• Form 433-B Collection Information Statement for Businesses

You may also have to supply supporting documentation.

While you apply for CNC status, the IRS will continue to charge you monthly late payment penalties and interest. You must continue making your estimated tax payments and federal tax deposits on time.

To determine if you could receive CNC status, contact the IRS.

• Individual taxpayers: 800-829-1040 (or TTY/TDD 800-829-4059)
• Business taxpayers: 800-829-4933

Periodic Review

Once you are placed on CNC status, the IRS will subject you to periodic review. Currently Not Collectible status typically lasts from six months to two years before a review but can last up to 10 years. If your income or assets increase, the IRS may require you to resume payments. For those with disabilities, the status may continue if income remains constant.

State Income Taxes

Even if someone is Currently Not Collectible, states may continue to impose state income taxes. Federal law protects certain income sources, preventing states from garnishing Social Security, pension, disability, and VA benefits.

Special protections exist for those receiving Supplemental Security Income and SSDI. When a state tax collector garnishes money from an account where the beneficiary receives Social Security, the law protects twice the amount of a monthly Social Security payment from garnishment. For example, if the monthly Social Security payment is $1,000, up to $2,000 in the account remains shielded from collection.

Help Getting Currently Uncollectible Status

If you need assistance requesting currently uncollectible status, the Taxpayer Advocate Service (TAS) could help. The TAS is a free government service that promotes taxpayers’ interests. The National Taxpayer Advocate heads the organization, which functions independently within the IRS. Each state has at least one Local Taxpayer Advocate.

You could also contact a legal aid organization for assistance. An attorney could help you work with the IRS to pause tax collection. Many qualified attorneys may offer free services to those in need.

In addition, HELPS, a nonprofit law firm, educates older adults and those with disabilities about their financial rights and helps them resolve tax, student loan, and housing issues.