There are several ways to deal with IRS debt. The most common are the Offer in Compromise, Bankruptcy, Payment Plans of various types, and Placement in Non-Collectible Status.
IRS NCS is a “designation” the IRS will place in it's system that stops enforced collection. It is used because you are able to prove to the IRS that your expenses are as much as or exceed your “allowable” expenses, and there is no available asset equity.
If you are placed in NCS, the penalty (if not fully applied) and interest continue to grow. If your income improves, the IRS will see the improved income and pull you out of the Status and demand a new disclosure of your income, budget and assets to see if your ability to pay toward the debt has improved. The IRS typically reviews your financial situation after each year.
Why IRS Not Collectible Status doesn't get rid of debt all by itself
NCS has nothing to do with the debt. It ‘s only “ability” is to stop IRS collection activity until your situation improves.
However, many people use it in combination with other legal options to reduce or “resolve” the liability.
The two most common legal options used in combination with the Non Collectible Status are:
1. IRS Statute of Limitations on collection
The IRS has 10 years to collect tax debt from the date it is created or “assessed”. This 10 year period can be extended by the period of time you are doing something that prevents the IRS from collecting, like filing a bankruptcy or an Offer in Compromise.
If the Statute Period runs out the debt goes away unless the IRS has reduced the debt to a Judgement (which is unusual)
Many people have serious tax debt and have just a few years left before the Statute Period runs out. They are also good candidates to be placed on NCS. In these situations, it usually makes sense to use the it with any eye toward the Statute Period to eliminate the Tax Debt.
If you are a candidate for NCS and can convince the IRS to place you there…and if the Statute of Limitations Period is a several years away..Bankruptcy may be an option. Part of the difficulty in qualifying for a Bankruptcy is making sure that certain time periods have elapsed between assessment and the date the Bankruptcy is filed.
These Bankruptcy time periods are stopped or “tolled” as well when you do things that stop the IRS from collecting.
The NCS doesn't stop any of these Bankruptcy time periods from running. It can be used as a result to stop collection activity while the tax debt continues to “become dischargeable”.
Whether you should use NCS as opposed to Bankruptcy or an Offer in Compromise or whether you should use it in conjunction with the IRS Statute of Limitations on Collection or Bankruptcy are questions that will require a careful review of the facts and your goals in order to reach an answer.
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