For anyone who owes back taxes to the IRS, obtaining Uncollectible Status is like reaching a Promised Land for Tax Debtors. It means the IRS has decided to temporarily halt any collection actions against the “uncollectible” tax payer because it’s just not worth it. Uncollectible Status does not mean someone owing the IRS is off the hook – the taxes aren’t forgiven (indeed, legally, they cannot be because Congress really, really wants us all to pay what we owe). But the IRS will leave someone with Uncollectible Status alone for up to three years. Sound good? It is. But it’s also tough to get.
How Does A Taxpayer Obtain Uncollectible Status?
The process for qualifying is similar to the process for applying for an Installment Agreement with the IRS (click here for a detailed explanation of Installment Agreements). Indeed, the first method to apply, is exactly the same. The taxpayer submits Form 9465 to enter into an Installment Agreement, and then Form 433-F, the Collection Information Statement in which they disclose all their income, assets, debts, expenses and liabilities. If a taxpayer’s income is only sufficient to pay basic, monthly living expenses, then the Installment Agreement “offer” will be to pay $0/month to the IRS. If the IRS accepts this, then they automatically classify the taxpayer as Uncollectible.
A second method is to complete Form 433-F, the Collection Information Statement showing how a taxpayer’s income only barely meets their monthly living expenses, and submit it with a cover letter to the IRS, requesting they be made Uncollectible. The letter and form should be sent to whatever IRS office has issued the taxpayer collections notices.
Under either process for applying, if the IRS agrees that the income the taxpayer receives is only sufficient to pay their basic living expenses (and if there are no assets the taxpayer can liquidate to pay the back taxes), then the IRS will grant the Uncollectible Status for anywhere from 18 to 36 months. At some point before the end of three years, the IRS will contact the taxpayer, and typically ask for them to submit Form 433-F again, to determine whether collection actions should commence or whether Uncollectible Status is renewed. In the meantime, the 10-year collection clock continues to tick.
Note that Uncollectible Status does not reduce or eliminate the tax debt – it just defers it. If, for example, the taxpayer wins the lottery, then the IRS will eventually come knocking on the door for full payment.
Also, the IRS does not advertise that it offers Uncollectible Status (go ahead and put the phrase into the IRS website’s search engine — you get a big, fat, nada). Indeed, even in the discussion of Installment Agreements, the IRS never discloses that this is available. But it is. The IRS doesn’t want to be swamped with requests to be made Uncollectible, and so it is officially silent on the matter. But, speak to any IRS collection agent and mention Uncollectible Status, and they know exactly what you’re talking about. Hey! This is the kind of insider information you come to me for, right?
Does It Make Sense to Hire An Attorney for Uncollectible Status?
There is a bit of a catch-22 with hiring someone to argue for uncollectible status: the IRS agent is likely to ask how you can afford to hire a professional like me if you don’t have enough money to pay your taxes. There are two ways around this. First, applying for uncollectible status is something most people can do on their own (follow what I’ve outlined in this blog and on this website regarding Installment Agreements). If you’re intimidated by contacting and speaking with the IRS, you can also hire me to coach you through it. It’s a lower-cost way to get my expertise. I look over the forms and letters you prepare to ensure everything looks good, and provide feedback on what you’re hearing back from the IRS, if you need a sounding board.
Second, when clients do hire me to manage the process for them, it’s usually because there’s another, longer-term element to the strategy, such as a bankruptcy once the conditions for the aging of tax debt is met (you can read more about that here and here). Some clients also hire me when we need to wait several years to get the tax debt old enough meet the 10-year IRS statute of limitations for collection. Under both these situations, it’s better for the client if they don’t have to pay the tax debt while they are waiting for these two types clocks to run down. In these cases, my fees are usually paid by a relative, and I let the IRS know that.
California Tax Agencies Do Not Offer Uncollectible Status
Finally, the California tax agencies (FTB, EDD, CDTFA) do not have Uncollectible Status. No matter how destitute a taxpayer is, California agencies very rarely agree to defer collection. At best, they will recognize a hardship for up to six months, then come back and insist on a minimum payment if the circumstances have not changed. Why is California so harsh? Read about the economic need to collect tax revenue that drives California tax authorities to be more draconian in collection efforts here.
May 24, 2022