Brotman Law To obtain currently not collectible status, you will need to consider addressing your concerns with a tax attorney who is an expert in resolving IRS back-tax liability and who is competent enough to review your financial situation “for free to determine whether pursuing Currently Not Collectible status is worthwhile; if hired, he or she will also take care of the rest of this process” (Hein).
The pros and cons of receiving a currently not collectible status are specific to the taxpayer’s ability to pay taxes owed. If the taxpayer is unable to pay, then he or she will receive this consideration. If the taxpayer cannot pay the tax owed, and the IRS fails to collect the debt in ten years, then the taxpayer will not have to pay the debt. However, there is a ten-year statute of limitations that the IRS can exercise in the event that the taxpayer is able to begin a payment structure.
IRS Currently Not Collectible (CNC)[1] is defined as the decision the IRS takes in concluding that a taxpayer has no ability to pay their annual federal income taxes. This type of status protects taxpayers from the “aggressive tactics of the IRS Collection Division” (Avvo.com, “Currently Not Collectible Status,” 8/18/2013). The IRS currently not collectible status is useful for taxpayers wishing to negotiate regarding their responsibility to pay off owed taxes. “Negotiating Currently Not Collectible status indicates to the IRS that you are serious about your responsibility to pay off taxes you may owe but do not have the funds to pay at this time” (Hein).
Filing for bankruptcy is an indication to your creditors that you are unable to repay your debts. On the other hand, bankruptcy provides you with protection from your creditors. It provides you with an opportunity to develop an effective debt repayment and management plan.
Unlike Chapter 7 bankruptcy, chapter 13 bankruptcy requires the taxpayer to pay all debts in full over a three-year to five-year period. With chapter 7 bankruptcy, most debts are cancelled and you must surrender some property to the bankruptcy trustee to pay creditors. However, with chapter 13, you end up paying most if not all of your debts over time. That’s why chapter 13 bankruptcy is considered the reorganization bankruptcy.
General unsecured claims and penalty claims refer to those taxes that do not receive priority tax claim status. These types of claims are not entitled to secured, administrative tax claim (Armknecht). They do not qualify for priority tax claim status because of the nature of the claims; they are, in fact, old claims.
Priority tax claims, as referenced in 11 U.S.C. 507(a)(8), include the following categories:
Secured claims are defined as those claims secured by a lien on the debtor’s property. The claim can only be secured “to the extent of the value of the property securing the claim. For example, a claim for $40,000 secured by a piece of property worth $10,000 would be a secured claim of $10,000 and either a priority tax claim or a general unsecured claim of $30,000” (Armknecht). When it is discovered that a creditor has a lien on a property that also has a superior lien “in excess of the value of the property, [then] the claim is not secured” (Armknecht). In essence, a preexisting lien determines the priorities of other creditors. The presence of a tax lien will determine whether the lien is a priority tax claim or a general unsecured claim. The amount of the lien is dependent upon the value of the property. “If the amount of the superior lien is less than the value of the property upon which the IRS filed its lien, then the IRS will have a secured claim to the extent of that the value of the property exceeds the value of the superior lien” (Armknecht). The remaining balance of the tax claim is still subject to the provisions that govern priority of claims under section 507 of the U.S. code.
When the debtor files a petition for bankruptcy relief, this action immediately affects the collection of taxes. Debtors should first familiarize themselves with preferred tax resolution methods specific to innocent spouse relief, a request for abatement of penalties, an installment agreement, or an offer in compromise (OIC). “Using administrative tax resolution methods instead of bankruptcy may help clients avoid having a ‘black mark’ on their credit history. However, a federal tax lien listed on the debtor’s credit report may damage his or her credit rating as much as a bankruptcy notation” (JournalofAccountancy.com, “Discharging Taxes in Bankruptcy,” 8/15/2013). When the standard options are not sufficient, petitioning for bankruptcy relief may be appropriate.
Chapter 13 bankruptcy is an option for individual debt adjustment under the U.S. Bankruptcy Code. Chapter 13 is a wage earner’s plan, which “enables individuals with regular income to develop a plan to repay all or part of their debts” (USCourts.gov, “Bankruptcy Basics PDF, p. 22,” 8/15/2013). Under chapter 13, the debtor proposes a repayment plan which allows for installments to be paid to creditors. When the debtor’s currently monthly income is less than the applicable state median, the plan will be for three years; however, the court reserves the right to approve a longer period. When the debtor’s current monthly income is greater than the applicable state median, the plan must be for five years. In this context, the plan cannot include payments that exceed five years. During the repayment period, “the law forbids creditors from starting or continuing collection efforts” (p. 22).