What does uncollectible status mean with the IRS?

The IRS sometimes will deem a taxpayer’s case as a hardship and code it to uncollectible status.  The IRS has the ability to classify a taxpayer as having so little assets or income that they don’t think it’s worth their effort to continue with collections.  Sometime the IRS will call this a hardship case, uncollectible or status 53 (which is the code number entered into the computer).

Uncollectible status has its pros and cons.  Starting with the downside, the cons are that the interest and penalties continue to accrue, and the IRS reserves the right to reevaluate the status at a future date to see if the taxpayer’s circumstances have changed enough to warrant collecting again.  That being said, it sure beats getting levied and losing most of your paycheck, not to mention stopping bank account levies (taking all money in the bank).

In many cases the advantages of uncollectible status can outweigh the cons. Sometimes, as mentioned above, it is far better to get this solution than wait for the IRS to do something bad.  If you can’t pay the IRS it really pays to be proactive and ask them to code you into uncollectible status. Then you won’t always be worried that the IRS is going to garnish your wages or levy your bank account or the myriad of other collection actions the IRS can take.  Many times we will ask the IRS to code a case to uncollectible to stop collections while we work on other solutions (such as an Offer In Compromise).

A lot of people don’t understand the differences between asking the IRS for time to work on a case or submitting an Offer In Compromise (OIC) and uncollectible status.  It is common to ask the IRS to stop collections for 14 to 30 days while we gather financial information to offer a solution, or to file outstanding tax returns.  Once we submit the financial information we are asking for a more long term fix to the problem.  Generally the financial information that we are preparing will indicate the solution, and it may show no ability to pay, which could support the solution of being placed into uncollectible status.  Generally uncollectible status is for at least a year and in many cases just stays that way until the taxpayer’s circumstances change in a material way or the statute for collections expires.  Be aware though, that the IRS will always take a case out of uncollectible status if the taxpayer owes again.

The differences between an Offer In Compromise and uncollectible status are pretty significant.  If you qualify for an OIC then the solution is permanent.  However, you must pay whatever amount is offered by the required time (generally 5 months) and make sure you file and pay all taxes for the next five years.  In general an OIC is a better solution because it’s permanent and you don’t have to worry about the IRS kicking it out if at a future date you earn more or acquire assets.  After an OIC is accepted you can earn as much as you like with no effect on the Offer.  The only caveat is if you had to sign a collateral agreement with the IRS. This is rare, but sometimes the IRS will set this up if they are fairly confident that your circumstances will change.

You really never know which solution is better between uncollectible status and an Offer In Compromise until the financial information has been analyzed.  But a few factors that would make uncollectible status a more desirable outcome would be if you had assets, such as a house that had too much equity to qualify for an offer, or the statute of limitations was going to expire soon.

A house with too much equity may cause an Offer In Compromise amount to be so high that you can’t fund the offer.  In many cases, the IRS may allow uncollectible status which allows you to keep the house where the house equity could foil an Offer In Compromise.

In regard to the Statute of Limitations, the general rule is that the IRS only has 10 years to collect a balance due once it’s assessed.  There are a few items, such as leaving the country, filing bankruptcy, filing an Offer In Compromise, and certain appeals that can increase the time the IRS has to collect the tax.  The 10 year period doesn’t start until a return is filed.  However, if the tax is old, it certainly isn’t a bad idea to look and see when the Statute Of Limitations is going to expire (we can get that date by requesting it from the IRS via a Freedom Of Information Act. If the Statute of Limitations will expire soon, then requesting uncollectible status may be a much better solution than an Offer In Compromise.  Instead of offering the IRS an amount under the OIC program, you simply wait out the statute and pay nothing.  The tax balance due (including penalties and interest), simply and irrevocably goes away!

Sometimes too, uncollectible status is a better solution than an OIC if you feel your circumstances won’t change much.  This could be due to an illness, disability or the simple fact that you are retiring.  In that case, even though the Statute of Limitations is a long way off, it may be best to just wait it out if you feel like nothing will change between now and then.  It can be a great solution to let the taxes just expire.  Once expired, it is not possible for the IRS to bring the balance up again.  It is permanently gone.

Generally when we meet with a new or perspective client we will consider the age of the tax (for statute limits) the person’s financial situation, and the individual’s personal life events before determining what the best solution may be.  There truly is no one size fits all solution to a tax problem, but uncollectible status is a great tool if the circumstances are right.

There is no one way to fix a tax problem and our free consultation allows us to meet with you at no risk to determine what your solution may be. Call us and let’s see what your possibilities are.