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The Tax Practice of IIT Chicago-Kent College of Law
The Tax Practice of IIT Chicago-Kent College of Law

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cnc status, tax debt, Chicago Tax Attorneys"Available for a limited time only," the advertisements said, "The IRS' CNC Tax Program can help keep you from paying the IRS if you can't afford it!"

You may have heard an advertisement like that on the radio or TV in the past few years. But the truth is that the Currently Not Collectible moniker isn't a 'program;' it's a status that selectin taxpayers can be placed in by the IRS, if they are temporarily experiencing an extreme economic hardship. There is no 'limited time," – that’s a sales pitch. Put simply, the CNC status is a tax controversy in which the IRS marks your account as "this person is too poor to collect from." That status doesn't mean that you don't owe the money; it just means that you can't pay right now, so the IRS goes into 'observation mode' and waits for you to show signs of being able to pay. Here's an example scenario:

 

  1. You fall behind on your installment tax payments.
  2. The IRS detects that you've fallen behind, and they terminate your installment agreement.
  3. The IRS re-engages its normal process of attempting to actively collect via calling, sending letters, inviting you to their office, and/or visiting your home or business.
  4. You still cannot pay.
  5. The IRS begins enforced collections, meaning they attempt to garnish your wages, seize your bank accounts, file liens against identified assets.
  6. You realize that they're going to come after you relentlessly (they are the IRS, after all) and that you can't afford to live if they keep messing with your paychecks. So, you talk to an agent and you demonstrate that paying what you owe – even by monthly installments - would create a severe economic hardship, such that you will not be able to pay your electric bill or buy groceries for your family. Furthermore, if your delinquency involves some form of paperwork (i.e. a tax return that was never filed, or withholding that was insufficient to meet your tax burden), you must resolve that problem as well. Finally, you file Form 433-A or 433-F, along with all of the statements, receipts, and paystubs that prove your hardship.
  7. The IRS will attempt to work with you to find an Offer in Compromise or other method of collecting on the debt first prior to using the CNC status. If they can squeeze something out of you, that’s the oreferred mode.
  8. Assuming that fails, the IRS puts the "Currently Not Collectible" status on your account, and they wait. Note that penalties and interest still accrue during this time - you just don't have to pay those penalties and interest until you're out of hardship.
  9. While they're waiting, you still pay your current taxes as normal; you just don't have to pay on the delinquent taxes you owe. If you fail to file or fail to pay, the CNC is dropped and collection efforts resume.
  10. If, on the documents you're filing in order to maintain your CNC status, your financial situation shows that you're doing well enough to begin payments on your existing debt, the CNC status is removed and collection efforts resume.
  11. Most CNC statuses come with a 'follow-up date' upon which the CNC automatically expires and the IRS collection efforts begin again. It may be possible to get back into CNC status by re-requesting, and thus obtain a new follow-up date.
  12. Finally, if your account remains in CNC status for so long that the debt expires (10 years in most cases), the CNC status ends and your account normalizes without any payments made on the debt (or the interest or penalties that accrued associated with that debt).

This process is long, full of numerous potential pitfalls, and it's not that great of an option anyway, as you have to live a life of poverty in order to utilize it. The one positive to CNC status is the knowledge that there is a scenario in which the IRS allows you to live and pay your bills without taking your grocery money. If you are behind on back taxes and are currently in (or on the road to) CNC status, it is important to seek professional guidance to determine your best path forward. At Chicago-Kent Tax Clinic, we provide free consultations and low-cost representation from attorneys with in-depth experience working with the IRS and in private practice. To speak with one of our skilled Chicago tax lawyers, contact us today at 312-906-5041.

Sources:

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innocent spouse, tax law, Chicago Tax AttorneyYour ex-husband, either accidentally or deliberately, failed to report income and the IRS caught it.  Now, you have a letter demanding that you owe the Service several thousand dollars in tax, penalties and interest, even though you had no income of your own that year and have since divorced the bum.  Is there any relief for spouses who had nothing to do with the issue that has now blown into a full-fledged tax controversy?  Perhaps.

Joint-and-Several Liability

When you file a joint tax return with your spouse, each one of you is "jointly and severally" liable for any understatement or underpayment of tax in connection with that return.  This means that each taxpayer is responsible for paying the

When you file a joint tax return with your spouse, each one of you is "jointly and severally" liable for any understatement or underpayment of tax in connection with that return.  This means that each taxpayer is responsible for paying the entire tax debt (though the IRS cannot collect more than the total amount of the liability).  Even if you had nothing to do with the preparation of the tax return, with the omission of the income or the overstated deduction, or even with the IRS audit, both you and your spouse are on the hook for the whole thing.

Innocent Spouse Relief

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Posted on in IRS

qualified offer, tax court, Chicago Tax AttorneysYour tax return has been audited, and you're reasonably certain that the IRS is (mostly) wrong.  While your inclination might be to take your winning case directly to the Tax Court, there are very good reasons why you should submit a reasonable offer to settle the case before you file your petition starting the litigation.

According to the IRS' own rules, if you make an offer to settle the case administratively (i.e., with the IRS Appeals Division) that is "qualified", and the IRS rejects the offer and you subsequently succeed in the Tax Court, you may be able to recover the costs you incurred in connection with your attempts to administratively resolve the case.

So, what’s a Qualified Offer?  One that is:

  • Made at least 30 days before the case goes to trial in Tax Court;
  • Specifies an amount of liability that you are willing to accept and pay;
  • Designated by you specifically as a Qualified Offer; and…
  • Not withdrawn (by you) before:
    • The IRS rejects the offer,
    • The trial begins, or
    • 90 days go by after the offer is first submitted to the IRS,

Given the high representation expenses typically incurred when dealing with the IRS Appeals Division (and simultaneously preparing for likely litigation), that is a potentially massive amount of money you can save if you are successful in court after submitting the Qualified Offer.  And, there really is not a downside, other than the time and effort it takes to make certain you comply with the requirements.

Details Added by Tax Court

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interest abatement, tax penalties, Chicago Tax AttorneysSo you've been unable to pay your taxes for a legitimate reason, and your taxes have accrued both interest and penalties because of the delay. I wrote last week about how to get the penalties abated for various types of 'reasonable cause’. Today, I’ll talk about getting the interest abated. In short: it probably ain't gonna happen.

Internal Revenue Manual Section 20.2.7.1 explicitly contains this warning in bold: "reasonable cause is never the basis for abating interest". In other words, it doesn't matter if you were evacuated from the hospital (where you were recovering from a stroke) due to a bomb threat and emotionally devastated because your mother passed away a day earlier and you're dead broke and need every cent you have to feed your three children and your financial advisor told you not to worry about it; you still owe the interest from your late payment. There's not even an option under the law for an IRS agent to have pity on you - the interest is due no matter what.  Why?  Its all bout the "time value of money", Congress’ justification for requiring interest accruals on all outstanding tax debts.  The idea is that you have had the government’s money all along, since the due date, and it could have been earning interest in the bank…

Unless…

Nevertheless,  there are six very limited circumstances in which the IRS is given the statutory authority to abate the interest on an account, as follows:

  1. The interest itself was assessed illegally or in error;
  2. The interest accrued as a result of "unreasonable error or delay" on the part of an IRS officer;
  3. The interest accrued on an erroneous refund;
  4. The interest accrued on a deficiency that the IRS didn't identify within its own time limits (generally speaking, 12 months);
  5. The taxpayer is living in a Federally-acknowledged disaster area;
  6. The taxpayeis participating in an active war zone.

"In Error"

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abatement, penalty abatement, Chicago Tax LawyersThe IRS, naturally, does not like to remove a penalty it has assessed. No matter how unfair these penalties may seem, you will still have to put in some work to get a civil penalty abatement to stick. That said, there are a fair number of reasonable causes upon which you can base a compelling argument:

Ordinary Business Care and Prudence

This category of abatement justification simply means "you did your best to pay your taxes, but couldn't for reasons beyond your control." Generally speaking, if you're not already a regular and conscientious taxpayer, you will not get the IRS to agree to this basis for abatement. But if you really did do everything in your power, and you've been compliant with your filing and payments for the past several years, you may be able to convince them that they should eliminate the penalty…this time.

Death, Serious Illness, or Unavoidable Absence

The "medical causes prevented me from paying" argument, if it's provable and true, is probably the most successful form of abatement request. It applies to individuals exactly like you'd expect, but it can also apply to businesses and institutions if there's only one person in charge of taxes, and if the businesses exercised 'ordinary business care and prudence' to try to get the taxes paid anyway and failed.

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installments, Illinois tax debt, Chicago Tax AttorneysIf you have a tax controversy with the State of Illinois and owe more than you are able to pay, you can apply for an installment payment plan through the State's website. The Illinois Department of Revenue is significantly less transparent about its processes than the IRS, and it accepts significantly fewer installment payment plan requests.

Filing Your Installment Payment Request

The form you need in order to petition for an installment plan is Form CPP-1. If you owe more than $5,000, you will also have to fill out either Form EG-13-I (for an individual), or Form EG-13-B (for a business).

What Happens Next?

Well, that's the frustrating part…it can be difficult to say for sure. Someone in the Illinois Department of Revenue office looks over your request, and he or she decides whether or not they are going to work with you. There is no publicly-available information about precisely how that decision is made, but we do know there are certain factors that will cause the state to refuse your request:
  • If the Illinois Department of Revenue decides you can actually pay the full amount, it will require you to do so;
  • If the Department decides you could pay the full amount if you secured a loan for that amount, it will require you to do so (essentially a payment plan, but you pay a bank rather than the State, and Illinois gets its money up front);
  • If the Department decides you can't really be trusted to pay installments, it may honor your request and put a lien on your property and assets that it has the right to exercise if you don't make every payment on time and in full. This can wreak havoc on your financial reputation;
  • If your request is, in any way, improperly drafted, the Department may return it to you and ask for further information, or it may simply deny it out-of-hand; or
  • If the Department decides your word is good enough, it might just honor your request without a lien…but even if it does, the Department reserves the right to add a lien to the arrangement at any time, for any reason, as it sees fit.

How to Maximize Your Chances of Acceptance

Because the precise mechanisms of the decision-making process are not fully known, the best advice available is fairly basic. First, offer as large of a down payment as you can afford (this is good practice in the long run anyway, as interest still accrues on any remaining balance as you make payments) – 20 percent or more is recommended. Second, make your payments as large as you can tolerate, but do not exceed a 24-month arrangement. The closer to your pain point you get, the more likely the Department is to recognize an honest effort and be willing to work with you.  And if an installment arrangement with the State fails, consider filing an offer in compromise… For further information on State of Illinois installment agreements or any other IRS or Illinois tax issue, contact one of the skilled Chicago tax lawyers at Chicago-Kent Tax Clinic. To schedule a free consultation, call our office today at 312-906-5041.
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