When you are in a situation that makes it impossible to pay the taxes that you owe, and it can be proven to the IRS that collecting from you will create a financial hardship, the IRS will put you into a noncollectable status known by IRS terms as “currently not collectible”. This status can be granted to individuals and corporations. In most cases, this status will be reviewed in one to two years to reevaluate if your financial situation has changed. During the time that your account is deemed as currently not collectible, the IRS will cease collection efforts (i.e. levies).
In most cases, the IRS gathers financial information of noncollectable status by making the taxpayer complete a 433-A, 433-B, and 433-F forms, and verify assets and income sources and amounts. These forms are very complicated to complete correctly since you want to give correct information that shows your inability to pay. The other factors the IRS uses to grant this status is a person’s age, education level, employment status, cost of living in the area the taxpayers lives, and medical issues, to name a few items the IRS considers. The IRS uses national and local standard expense amounts, so deviations from the standardized amounts need to be proven for each case.
The IRS defines hardship in perhaps a way that you would not. If you do not have assets, and your income is only enough to cover basic living expenses, then there is a good chance that the IRS would not view your income as being a good levy target and you would be deemed currently not collectible. If you have assets, it will be more difficult to prove this status even though the assets may not be liquid.
It is critical if your account is placed in currently not collectible status that you remain current with your taxes by filing tax returns timely and paying current taxes by the due dates (including any estimated taxes). However, if the IRS has determined you to be noncollectable, and you incur a new tax debt within 12 months of them determining that you are currently not collectible, they will typically add the new unpaid tax debt to the total debt owed without a new determination of currently not collectible status. If you have unfiled tax returns, this would be a good time to become current and file all missing tax returns there is a certain subjective component of the IRS determination, and you want to show good will in resolving your tax problem.
In most cases, once you are deemed noncollectable, the IRS will file a tax lien on your property to protect its interest in any assets you have if you owe more than $10,000. When a tax lien is filed, this event will lower your FICO score, so sometimes its better to establish a payment plan that to go this route. Since filing a tax lien can further create a financial crisis, a Form 9423 and Form 12153 appeal should be filed to try to avoid the tax lien filing. The other downside of being put into this noncollectable status is that penalty for not paying the taxes, and interest still accrue, so your tax debt becomes larger.