Before an individual will be placed in Currently not Collectible (CNC) status, his/her financial records will be thoroughly investigated.  More specifically, his/her monthly earnings will be weighed against allowable monthly expenditures, which are expenses IRS Code deems reasonable.  In the event that a taxpayer’s expenditures almost outweigh, or outweigh, his/her earnings, the individual may qualify for CNC status.

As a part of the investigation, the IRS will look for any assets owned by the taxpayer that could be used to pay off the IRS tax debt.  Home equity, second vehicles, additional monetary funds in any bank accounts, or any assets that could be traded for cash.  If the determination is that no cash would become available by liquidation of assets, or that said liquidation would cause undue hardship, then the taxpayer may still qualify for being placed in CNC status.

Overdue accounts find it more difficult to find IRS tax relief.  They will be investigated closely and will proceed with a negotiation, requiring proof of income, expenditures and any and all assets owned by the taxpayer before providing IRS tax relief.

Additionally, missing tax returns within the six-year time frame are excusable if the individual did not accrue sufficient income to warrant filing a tax return.  For years when this was the case, a missing tax return does not have any effect on the taxpayer’s compliance.  More detailed rules concerning the necessity of filing a tax return may be found in IRS Publication 501, 2008, as there are considerable differences for each individual.  For example, a couple comprised of individuals under 65 who, when incomes are conjoined, makes below $17,900, does not need to file a tax return.  That number changes depending on marital status, whether the individual is the head of the household, age, etc.

On the other hand, in the event that a taxpayer is responsible for a missing tax return, he/she may still choose to avoid compliance with the IRS by not filing the missing return.  In this case, the individual runs the risk of a Substitute For Return being filed by the IRS.  A Substitute For Return does not add any exemptions the individual may be entitled to, as well as deductions or credits.  The other major risk the individual runs when they choose not to pursue compliance is collection by the IRS.

Housing and General Housing Expenses

Mortgage, rent, homeowner’s insurance, renter’s insurance, phone, sewer, garbage, water, gas, electricity, and other miscellaneous costs fall under this category.  It is important to note that many households go beyond the standard funds allotted to these allowable expenses, and the IRS is quite strict about not exceeding the standard limit for these subtractions from the Reasonable Collection Potential.

Vehicle Operating Expenses

All additional costs for maintaining a vehicle fall under this heading, such as fuel, insurance, repairs, registration, and maintenance (check-ups, oil and lubes, alignments, tire rotation, etc.).  However, those submitting an Offer in Compromise may be able to claim additional fees.  In addition, vehicles with over 75,000 miles on the odometer and over 6 years old qualify for an additional $200/month that will not be available to pay off tax debt.

The Necessary Expense Test

The expenses that meet the necessary expense test requirements are charges deemed the right of United States citizens, such as health insurance, term life insurance, mandatory retirement, union dues, and dependent care.  The individual must submit accompanying documentation for each of these costs in order to subtract them from the Reasonable Collection Potential.

Conditional Expenses

These are the expenses that fail the Necessary Expense Test, but in the event that the individual may still pay off the total tax debt within a 5-year time limit, they may be allowed.  Tuition, charities, credit card payments, and other expenses are some of the most common conditional expenses.

Some of the preceding expenses may be prorated if there are other, non-liable parties living in the household who generate income, which means housing and vehicle operating fees, for example, may be determined to be shared between the individual with tax debt and non-liable parties, dropping the allowable expenses.

Levies and liens are often confused. While a lien is merely a security for tax debt, a levy, on the other hand, is the process by which the asset is seized and sold to reconcile tax debt.

An IRS tax levy can be assessed after:

(1) The IRS sends a Notice and Demand for Payment;
(2) The taxpayer fails to pay off the tax debt;
(3) The IRS sends the Final Notice of Intent (left at the home, work, last known address, or served in person); and
(4) The IRS sends Notice of Your Right to a Hearing.

In the event that the IRS intends to levy an asset of the taxpayer’s, the taxpayer may request an IRS manager to review his/her case or a hearing, by filing for Collection Due Process with the Office of Appeals. Any filing must transpire sooner than 30 days after the Notice.

After an IRS tax levy has begun, it will discontinue only after one of the following:
(1) The tax liability is fully paid;
(2) the taxpayer pursues tax resolution with the IRS, resulting in the release of the levy;
(3) The Statute of Limitations associated with the tax debt expires (usually 10 years after the last liability was accrued).

In the event an IRS tax levy is placed on the taxpayers bank account, the bank is legally obligated to put on hold all current deposits, up to the amount of the tax liability. This is to allow attempts at resolution to take place, either through appeal or an IRS program for tax resolution. At this time, the owner of the account may claim that some of the money withheld must be used for living expenses, such as housing, transportation, etc., in which case the IRS may release some of the money. 21 days later, if the tax liability has not been addressed, the bank sends the withheld money to the IRS.

Revenue Officers (ROs) are the most capable arm of the IRS. They have total authority over collection of tax debt, which means they can visit the individual at work or home, call, issue summons, levies or liens, seize accounts or property.

Comprised of about 6,000 members, this branch of the IRS only comes into play under extraordinary circumstances, such as: (1) when the IRS has been unable to collect via preliminary channels (levies, liens, calls, notices, etc.); (2) when the individual has regularly practiced tax evasion; (3) when the individual has only failed to fulfill certain types of taxes; (4) or when the individual has an extraordinarily grand liability.

Due to their limited caseloads, it is likely they will promptly follow through with collection threats, so their presence should be taken seriously. But there are certain advantages gained by their authority. Just as they can collect back taxes, they can also resolve back taxes by issuing Installation Agreements or enrolling taxpayers into Currently Not Collectable status.

Among their other powers, Revenue Officers can demand full tax filing compliance when negotiating tax debt. Even in the cases where the Automated Collection Service (ACS) has already enrolled the individual in Currently Not Collectible status without the current year’s tax return being filed, a Revenue Officer can place tax debt resolution on hold until the taxpayer’s filing compliance is gained.

Furthermore, all notices or summons sent by Revenue Officers should be responded to promptly. This may entail sending in certain forms, such as IRS Form 433-A/B or a Summary of Contact Form. Regardless of the request, it is advisable for the taxpayer to fulfill the requirements of the form and contact a tax attorney, rather than speaking directly to an RO.

Often there are circumstances that arise when a taxpayer has accumulated a substantial tax liability that clearly exceeds any ability to pay in a lump sum. In this situation, the taxpayer should consider hiring an Offer in Compromise attorney to handle the negotiations with the IRS.

The IRS applies the same collection standards utilized in installment agreements to offers in compromises. They will allocate an amount for clothing, food, housing related costs, vehicle transportation, and medical or dental costs. They will also consider any legal cash commitments like student loans, alimony and child support. Ultimately, based on this analysis, the IRS determines whether it is possible to grant relief under an offer in compromise.

Most offers in compromise are denied as the IRS recently stated that over 83% of the offers are rejected. The two main reasons that rejection occurs is because the documentation is inaccurate or incomplete or the taxpayer earns in excess of the required allowance. Your offer in compromise attorney will make sure that your filing is accurate and complete.

Upon submission of the OIC, the IRS must verify that the offer can be processed. The offer goes through a screening process to determine if the taxpayer or taxable entity has: (1) paid the required application fee; (2) ensured that all delinquent tax returns have been filed; (3) not instigated a bankruptcy court proceeding; and (4) not been issued an audit notification.

Hiring an offer in compromise attorney can help you improve the chance that your offer will get accepted. At a minimum they can review your situation and provide you valuable information that will allow you to make an informed decision.