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How to Get Your IRS Debt Declared Uncollectible

March 21, 2024 Uncategorized


How to Get Your IRS Debt Declared Uncollectible

Dealing with IRS debt can be super stressful. The letters keep coming, the phone calls don’t stop, and the penalties and interest keep adding up. You feel like you’re drowning with no way out. But there is hope! You may be able to get your IRS debt declared uncollectible. This article will explain what that means, how it works, and what you need to do to make it happen.

What does “uncollectible” mean?

When the IRS declares your tax debt “uncollectible,” it means they’ve determined you can’t afford to pay the debt right now [4]. It doesn’t make the debt go away completely or reduce the amount you owe. The IRS will just stop trying to collect for the time being. Your account basically goes into an inactive status. This can give you some much-needed breathing room and relief from IRS letters and calls.

How does the IRS determine if you’re uncollectible?

The IRS looks at your financial situation – your income, expenses, assets, and liabilities. They want to see if you could pay even a small amount each month. If you truly can’t afford to make any payments, they may put your account into uncollectible status. They will periodically check back in to see if your financial situation has improved. If so, they may try to start collecting again.

What are the requirements to be declared uncollectible?

There are no hard and fast “requirements,” but in general:

  • Your income should be below a certain threshold based on the Federal Poverty Level
  • You have few assets the IRS could seize and sell (like a house or car)
  • Your necessary living expenses equal or exceed your income

The IRS will look at your unique financial circumstances. Having low income, high expenses, and no assets makes you a good candidate. But even people with moderate incomes could qualify if their expenses are also high.

How do you apply to be declared uncollectible?

You need to submit either IRS Form 656-B (Offer in Compromise) or Form 433-F (Collection Information Statement). On these forms you list your income, expenses, assets and liabilities. Form 433-F is simpler, but Form 656-B gives the IRS more details about your finances. Include documentation like pay stubs, bank statements, bills, etc. to back up what you report. Mail the forms to the IRS office handling your case. You can call the IRS to get the correct address. Be sure to keep copies for your records!

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What happens after you apply?

After receiving your paperwork, the IRS will review your financial information. They may ask for additional documentation or clarification. Be responsive to any IRS requests – it will help move the process along. If the IRS determines you qualify as uncollectible, they will send a letter confirming your account is in currently not collectible status. This may take 3-6 months after you first applied. Such a relief!

What are the benefits of being declared uncollectible?

There are several advantages to having your account deemed uncollectible:

  • The IRS stops collection efforts like letters, calls, wage garnishment, bank levies, etc.
  • No more penalties and interest added to your balance
  • Prevents IRS tax liens from being filed
  • Gives you time to improve your financial situation
  • Possible to get partial installment agreement for very low payment

This can provide much-needed relief from the stress of IRS collection action. You can focus on getting back on your feet financially without new fees making it worse.

What should you do if declared uncollectible?

Congratulations, you’ve been declared uncollectible! Now what? Here are some tips:

  • Review your IRS account periodically to ensure it maintains uncollectible status
  • Continue setting aside money when possible in case the IRS starts collecting again
  • Stay in touch with the IRS about any changes in your income or expenses
  • Avoid acquiring assets like a house or car unless you can afford the payments
  • Consult a tax pro about your options before cashing out retirement accounts or inheriting money

Even if uncollectible now, your IRS debt doesn’t disappear. So be thoughtful about any lifestyle changes or finances improvements that could impact your status.

When would the IRS start collecting again?

The IRS typically reviews uncollectible accounts every year. If they see your financial situation has improved significantly, they may start collection action again. Some common reasons the IRS would start collecting again:

  • Your income increased by a large amount
  • You inherited or received a large sum of money
  • You acquired assets like real estate that could be seized
  • You started your own business that is profitable

Of course, your income rising by a small amount probably won’t trigger collections again right away. But substantial increases in income or assets would definitely get their attention.

Are there downsides to being declared uncollectible?

While being deemed uncollectible has many benefits, there are some potential downsides:

  • Your tax debt isn’t reduced at all
  • The 10-year statute of limitations on collections remains in effect
  • Future tax refunds may be applied to your balance
  • Interest and penalties resume accruing if the IRS starts collecting again
  • Tax liens could still be filed if you acquire assets in the future

So while uncollectible status gets the IRS off your back for now, it’s not a permanent fix. The debt continues to legally exist in full. Make sure you understand the implications before assuming your tax troubles are completely over.

When does the debt expire?

In general, the IRS has 10 years to collect tax debt from the date its assessed. After 10 years, the debt “expires” and can no longer be legally collected. But the timeframe gets paused if your account is in uncollectible status. For example, if you still owe taxes from 2014, the 10 years doesn’t run out until the uncollectible period ends. This stoppage keeps the IRS from running out of time to collect from taxpayers in financial hardship.

There are a few exceptions where the 10-year limit expires even if uncollectible:

  • If an Offer in Compromise is pending
  • During certain installment agreements
  • When collection is suspended due to a bankruptcy filing

But in most cases, being uncollectible hits the pause button on the 10-year IRS collection statute.

Can you settle for less than you owe?

Yes! Being declared uncollectible and settling your tax debt for less than the full amount (called an “offer in compromise”) are two separate things. They can work very well together. First get your account deemed uncollectible to stop IRS collection and penalties. Then submit an offer for a reduced settlement amount. The IRS may accept it since they know they likely can’t collect the full debt.
Offers require strict eligibility rules and lots of paperwork. But the savings can be huge if you settle your tax debt for just pennies on the dollar!

Should you hire a tax pro?

Trying to deal with the IRS on your own can be intimidating and confusing. Often times, hiring a tax professional is worth the money. An experienced Enrolled Agent or CPA can help you:

  • Determine if you qualify as uncollectible
  • Navigate the IRS application and documentation process
  • Communicate with the IRS on your behalf
  • Monitor your account status going forward
  • Explore other payment options if you don’t qualify

A tax pro takes the burden off your shoulders and handles communicating with the IRS. Look for someone experienced specifically with IRS collections and settlements. This can relieve a lot of headaches and stress!

The bottom line

Having your account declared uncollectible can be a lifesaver if you’re struggling with IRS debt. Take time to understand the program fully. Submit detailed financial information showing you have little income and assets. This pause in IRS collection activities can give you some much-needed breathing room while you get back on your feet. Just make sure to monitor your status so you don’t get caught off guard if the IRS starts collecting again down the road.

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