The IRS Can’t Get Water From a Stone
The IRS authority for marking an account “uncollectible” is found in IRS Policy Statement 5-71. It states that if after pursuing the collection process the IRS determines that the account is currently not collectible, this should be reported in order to remove the taxpayer from active collection.
Currently not collectible, or “hardship” status occurs when the IRS agrees that repayment would create an economic hardship. It is forbearance by the IRS and a break from enforcement that can last years—or until the time expires for the IRS to collect the tax. Within the IRS, hardship is known as “53” for the transaction code the IRS attaches to your account to reflect suspension of collection activities.
How to Become Uncollectible
Household Income and Monthly Living Expenses. A major factor is getting the IRS to agree that, after paying expenses like rent, car payment, medical expenses, and food, there is no money left to pay the government. Of course, the expenses must be reasonable for the IRS to consider hardship status.
Assets. The IRS will consider hardship if you have little or no equity in your property. And even if there is equity, the IRS will still consider hardship if it can be shown that seizure of assets would create hardship. For example, a car could be seized by the IRS, but it’s needed to get to make a living.
The Hardship Letter
You may receive one of two letters from the IRS if you obtain hardship status. (I've scanned in two examples from our client case files) Letter 4223 or 4624C will be issued to the taxpayer when a case is closed as uncollectible. The letter states: “Case closed—Currently Not Collectible.” The letter states the type of tax and the periods that are temporarily closed due to hardship. The letter states that the government may reopen the case in the future if the taxpayer's financial condition improves. Interest and penalties will continue to accrue.
When you get any of these two letters, the IRS will update their computer database and call off the dogs. It’s wise to obtain IRS account transcripts confirming a line item reading “Case Currently Not Collectible.”
Uncollectible Status Can Be Permanent or Temporary. After being classified as uncollectible, the IRS will once a year review your financial condition to determine if it has improved. Even if uncollectible status is temporary, it can ideally position you to work out a long-term tax solution.
Using Uncollectible Status to Eliminate Tax Liability
If the status lasts long enough, the time the IRS is allowed to collect the tax expires. The IRS gets zilch. The tax balance, interest, and penalties are wiped out. As discussed in the article on the IRS statute of limitations, the IRS has 10 years to collect, starting from the date the tax is assessed. We always obtain our client's master tax transcript to make sure we calculate the time limitations correctly.
One Important Consideration with Uncollectible Status: While you are in uncollectible status, interest continues to add up. For this reason it is critically important that you and your tax attorney calculate the collection limits and make a determination whether the uncollectible status will be temporary or permanent.
However, even if uncollectible status is temporary, it can ideally position you to permanently resolve the tax problem using other tax forgiveness methods explained in this book, like an offer in compromise or bankruptcy.
We have a documented track record of obtaining hardship for many of our clients. Please call us anytime if you would like to learn more.
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