If you can’t pay a tax debt because of a financial hardship, you can request currently not collectible status. Common reasons include job loss, medical conditions, or disability.
What Does Currently Not Collectible Status Do?
If the IRS agrees that you can’t pay for both your basic living expenses and your tax debt, it may agree to place your account in currently not collectible status. This will typically stop the IRS from taking additional collection steps such as sending more threatening letters or issuing a letter. It does not stop interest and penalties from accruing.
Who is Eligible for Currently Not Collectible Status?
To be eligible for currently not collectible status, you must be able to demonstrate a serious financial hardship. This means that you don’t have enough income left over after paying for bare-bones living expenses to pay your tax debt. The IRS may also require you to file any past due tax returns if you haven’t done so.
To learn more about how the IRS decides if you qualify, you can read their collecting process manual (written for IRS employees and tax professionals).
When Should You Use Currently Not Collectible Status?
Consider using currently not collectible status when you’re in financial trouble but expect your situation to improve. If you don’t expect to ever be able to pay off your tax debt, an offer in compromise might be a better option.
You may also wish to talk to a bankruptcy attorney about whether bankruptcy is an option. Keep in mind that the rules for having a tax debt discharged in bankruptcy are much stricter than the bankruptcy rules for other types of debt.