“Currently Not Collectible”: What It Means for Your IRS Tax Debt

When you’re unable to pay your tax debt, the IRS offers some temporary relief through the Currently Not Collectible (CNC) status. While CNC may seem like a solution to pressing financial issues, it is important to understand the potential consequences that come with it.

Let us explore below the key implications of CNC status and what it means for taxpayers.

1.    The IRS stops “active collection efforts”

The IRS may assign a taxpayer with a “Currently Not Collectible” status when the agency deems that the taxpayer is not in a financial positive to pay the tax debt. As such, the IRS puts a temporary delay on some of their collection efforts – specifically seizing assets and garnishing wages. Other collection mechanisms, however (such as a tax lien) may still be enacted.

Note: CNC status does NOT mean that the tax debt is forgiven or even that it stops growing. See the next point for more about this.

2.    Your tax debt continues to grow

One of the most significant consequences of CNC status is that your debt doesn’t freeze, even though the IRS stops active collection efforts. Penalties and interest continue to accrue on the outstanding balance. Each day your tax debt remains unpaid, additional interest is charged, and penalties for non-payment may stack up. Over time, this can dramatically increase the amount you owe.

For example, even if the IRS pauses wage garnishments or bank levies, the debt itself will keep growing due to these added charges. Taxpayers should keep in mind that CNC status is only a temporary relief, not a permanent solution to the problem.

3.    Risk of a federal tax lien

Though CNC status stops the IRS from seizing your assets or garnishing wages, they may still file a Notice of Federal Tax Lien. A lien is a legal claim the IRS places on your property to ensure they can collect what’s owed in the future. The IRS files this lien to protect their interest, especially if you acquire assets while in CNC status.

A lien can have serious consequences, including:

• Damaging your credit score
• Making it difficult to secure loans or credit
• Complicating the sale of property, since the IRS may be entitled to proceeds before other creditors

Even if collections are paused, the lien can stay in place, making it harder for you to make significant financial moves.

4.    Periodic financial reviews by the IRS

CNC status is not indefinite. The IRS will regularly check in on your financial situation to determine if you’re still unable to pay. This means that CNC status comes with the possibility of being reversed if your financial situation improves.

For instance, if your income increases or your expenses decrease, the IRS may decide you’re able to make payments again. In this case, collection efforts could resume, including wage garnishments or levies.

During these periodic reviews, you’ll be expected to provide updated financial information, so it’s important to stay organized and prepared to demonstrate your financial hardship if your situation hasn’t changed.

5.    Limited options for future financial flexibility

CNC status may offer immediate relief, but it can limit your future financial flexibility. The tax lien, growing debt, and regular financial reviews make it challenging to build a long-term financial strategy. In addition, many taxpayers find it difficult to pursue other credit opportunities while under a lien, which can hinder their ability to borrow money, buy a home, or finance major purchases.

Moreover, since CNC is a temporary status, it doesn’t resolve the underlying tax debt problem. Eventually, you’ll need a long-term strategy to address the debt, whether through a payment plan with the IRS, an Offer in Compromise, or other resolution method.

Final Thoughts

While Currently Not Collectible status can provide much-needed relief when you’re unable to pay your tax debt, it comes with significant implications. It may feel like a temporary reprieve – but it is not a solution to your tax problem. From increasing debt to the risk of a tax lien, taxpayers should carefully consider the impact of CNC status before deciding to pursue it. It’s important to have a plan for addressing your growing tax debt and protecting your financial future.

If you’re unsure about CNC status or want guidance on your tax situation, call us at (305) 564-9199 or fill out our website contact form for a free and confidential consultation.