Stuff happens. One in five businesses has an IRS tax liability, and most businesses will accrue a debt with the IRS at some point in their lifetimes. If your client has fallen behind with the IRS, there are several options to resolve the liability. One possibility is that the IRS could consider the business “uncollectable,” and they may not have to repay anything. While this probably sounds great, as with anything in life, the devil is in the details. “Uncollectable” or currently not collectible (CNC) status with the IRS is only a temporary solution. The IRS withholds or delays collections, usually until your financial condition improves. However, CNC status is not a final or permanent solution; the debt is not considered “paid” and it does not go away. CNC status will not provide a lender with sufficient protection to continue funding. In this article, we will explain what you need to know about CNC status and what it means for you and your clients.
Currently Not Collectible Status Qualifications and Requirements
To qualify for CNC status, all returns must be filed, and the business must be current with federal tax deposits. Additionally, the business must demonstrate financial hardship, essentially that the expenses exceed your income. This process requires providing supporting documentation (i.e., information about assets, income, expenses, etc.) to substantiate the claim.
The Issues with Currently Not Collectible Status
Currently not collectible status is appealing, especially when a business is struggling to pay bills. For some taxpayers, mostly individuals, it can be an effective strategy, even if it is temporary. However, if for businesses working with a bank, asset-based lender, or factor, there are several complications.
- Currently not collectible status is temporary. The IRS will periodically review the business’s ability to pay. When the finances improve, the IRS can resume collections. Similarly, if the business accrues a new period of liability or fails to file a return on time, the IRS can resume collections.
- Penalties and interest will continue to accrue while the business is in CNC status, so the liability will continue to grow until the debt is paid in full.
- The IRS can still file a federal tax lien at any time (if they haven’t already).
- If the IRS has filed a federal tax lien, CNC status does not offer sufficient protections to address lenders’ concerns (so lenders typically cease funding). The IRS does not alert anyone, including the lender, when they remove the CNC status. Lenders cannot reliably predict if or when the IRS will levy receivables, which threatens the lender’s collateral. Additionally, lenders typically require a subordination of federal tax lien to continue funding, which requires an installment agreement as a perquisite. The IRS will not consider a subordination if CNC status is in place.
An Alternative Solution to Corporate Tax Liability: Partial Payment Installment Agreement & Subordination
A partial payment installment agreement is typically a better option for businesses, especially those funding with a bank, asset-based lender, or factor. An experienced representative can negotiate an affordable monthly payment plan, allowing the business to keep up with current obligations and satisfy the IRS debt. An installment agreement provides predictable protection for the business and you, the lender. As long as the agreement is in good standing, the IRS cannot levy bank accounts or accounts receivable.
The Benefit of an Installment Agreement Over a CNC Status
Worst case, the business defaults on its arrangement with the IRS. How the IRS responds is a substantial and important distinction between CNC status and an installment agreement. With CNC status, the IRS does not issue a notice before it resumes collections (i.e., levies, seizures, etc.). However, with an installment agreement, the IRS must issue a notice of intent to terminate the agreement. The business would have 75 days to correct the default before the IRS would return the case to the Collections Division. During those 75 days, the IRS cannot issue a levy. There is predictable protection for both the taxpayer and lender.
If a lien is filed, you are likely going to require a subordination of that lien. An installment agreement in good standing is a prerequisite for a subordination of federal tax lien. The IRS’s Technical Advisors will not consider a request for a subordination unless there is an installment agreement in place; they do not accept CNC status. This is the biggest reason why a partial payment installment agreement is preferable to CNC status.