How to keep the IRS off your back for months or years

When I had to do a short sale on my own house, my blood would run cold every time the mail man came to my house and I heard the thud of the letters dropping into the slot.

Girls on motorbikes

"The IRS doesn't own our motorbikes! They can't go after them either, because we are CNC" Photo courtesy of http://www.flickr.com/photos/atxj2007/

I knew that one day, I’d get a bill for hundreds of thousands in tax liability for “cancellation of debt” income. And then what would I do? This article spells out something you will want to know about, if you owe the IRS money or know someone who will, or are afraid you will owe them money.

IRS code sometimes protects you

It turns out that the tax code’s 7 million bazillion pages don’t just give the IRS rights. They give YOU rights too.

Some of these rights are pretty major. Sometimes, Congress really screws up. They stop worrying about just collecting the clams from Joe Taxpayer. And they give Joe a few “rights.”

Girl who owes the IRS money

Does this girl owe the IRS money? It's not like being in prison. The IRS tax code's 7 million lines give the taxpayers some important rights. Photo courtesy of http://www.flickr.com/photos/aturkus/

Because after all, the politicians need to appease the voters back home, don’t they? One of those rights is really, really important IF you owe the IRS money and can’t pay. The weird thing is that so many folks just can’t get their arms around this. Because their accountants don’t tell them! Why don’t the accountants tell people about these important rights?

Why accountants may not tell you about your rights when you owe taxes

The accountants are often afraid of the IRS.

They don’t want to make waves. Accountants are tracked in an IRS database. And accountants worry about getting bad marks in this database. Some of them would rather play it “safe” which is not safe, but simply cowardly, when it comes to their clients.

Others don’t know about important tax code provisions that protect taxpayers. They lack the knowledge and they don’t get this knowledge when they go to the continuing education courses that they must attend. So what are these rights? I’m going to talk about two of them. One is about…

Cancellation of debt income and the dreaded 1099

IRS tax form

Do you owe the IRS money? What if they can't collect from you because you legally stop them? Photo courtesy of http://www.flickr.com/photos/joshmt/

If you owe money and then the debt is settled for less than you owe, the IRS code considers the amount that was forgiven or settled as “cancellation of debt income.”

You can see why this is. If you borrow $100,000, that borrowed money is not income. Borrowed money must get paid back. So no income. But if you then settle with the lender for $10,000, the $90,000 that was forgiven is suddenly money you received but do NOT have to pay back. Ever. So that $90,000 would be cancellation of debt income.

Just because you have income supposedly, does that mean you owe taxes on it? Not necessarily. There are many cases where you may get a 1099 for cancellation of debt income…and STILL owe no income tax. The tax code is very specific about three instances where you do NOT necessarily owe income tax for debts that are settled:

  1. If the loan was non-recourse
  2. If you were “technically insolvent” when the loan was settled,
  3. If the loan was for owner occupied real estate (with some other provisions)

There are other provisions that may mean you do NOT owe income tax on debt settlement amounts. But you get the idea.

For example, in #1 above, “non recourse”, that is the case, perhaps, if you have a first mortgage in California. First mortgages in California are usually structured as non-recourse in effect, so if you are aggressive you might do a short sale and then even if you DO get a 1099, you can show it was non-recourse because of California law.

Besides the cancellation of debt income issues, even if you do owe the IRS, there is another huge provision that can save your financial life. And again, accountants usually don’t know the ins and outs of this. Many don’t even know this exists. It’s called…

Offer-In-Compromise with the IRS

An Offer-In-Compromise sounds really good. It lets you settle with the IRS for dimes on the dollar. You just fill in a long application, perhaps speak to the IRS a few times, and voila, your debt to the IRS is mostly gone. Just cut a check and settle.

One man I know had a partner who embezzled money from their business. Payroll tax deposits went through this partner. But instead of paying the IRS, the partner took the money. And when collection notices came through the mail, the partner intercepted the mail and never showed the collection notices to anyone.

After things got pretty hot, the partner disappeared. And the other partners were left with an IRS debt of over $1 million.

IRS ends

I personally would like the IRS to go away. But legally, I can only make them go away from ME if I am "currently non collectible", a little known but powerful secret locked in the tax code. Photo courtesy of http://www.flickr.com/photos/josh/

So my acquaintance was one of the partners left holding the bag. It wasn’t realistic for him to ever pay the IRS the full one million dollars. So he did an OIC. The IRS accepted it, and my acquaintance cut a check for $100,000 and was given a full written release by the IRS.

Offiers-in-compromise are not granted very often. So my acquaintance was lucky. His case was an exception. The IRS grants an OIC if they feel you can never pay the money back. I had a young employee in his early twenties who got one. But that is even rarer.

So if an OIC is very diifficult to get, what else protects you if you owe the IRS money?

Currently Not Collectible status with the IRS

The IRS tax code has a provision called CNC by the insiders. Currently Not Collectible means if you owe the IRS money, and you don’t have it, you can get yourself put on CNC status.

The IRS can’t go after you.

You don’t have to worry about them.

In many cases, if they’ve pursued you and collected, they have to give the money back.

And this can go on for years, even 10 years.

CNC status is the most little-known and powerful part of the tax code. It is amazing because in many cases you can earn a pretty high income and the IRS can’t touch you.


Click here to learn how to Become IRS Bulletproof

54 Responses to “How to keep the IRS off your back for months or years”

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  1. Dawn says:

    Interesting. Is it true that technically the IRS doesn’t have a leg to stand on if someone quits paying their taxes? I know of a couple of people who haven’t paid taxes in years, and nothing has happened to them. Apparently there is no law stating that people must pay an income tax?

    Would like to know under what circumstances and how someone can apply for CNC status. Thanks.

    • Christine Woodley says:

      I’ve paid money for a company to get my taxes reduced, but because I still owe them $1000, inwhich I don’t have it to give them they refuse to help me or release my information. They have my 06, 07, 08 tax info. They are called ProTaxCare. the IRS has already started garnishing my husband wages. My house may be foreclosed on. We paid US Mortgage Bailout $2500 to do a home modification and now they are out of business and has not given me my money back like they guaranteed. My husband and I work for Wal-Mart @ $8.50 hr. Savings are gone. What can we do to save ourselves? We don’t want to be homeless we have our 96 yr old mom in law to take care of. Help me please!

      • Julie says:

        Call the Taxpayer Advocate Service there is at least one office in every state, they are a separate division of the IRS that assist people who can not afford to hire an attorney to take care of their tax problems. They are helping me get a CNC. I filed for an OIC with no luck and called TAS which their number was given in the paperwork the IRS sends. I owe over 13K and I only make 14k a year with $2604 in child support, I can’t imagine not getting it.

  2. George Beppu says:

    I am coded CNC but I still received collection letters.

  3. Ron says:

    Could CNC be applied to someone that just converted $200,000 of their traditional IRA’s over to a Roth IRA and now they find that they’ll be unable to pay the income tax on the conversion, even though it can be spread over two years?

  4. G.D. Chaplin says:

    Hi, I had a medical clinic that I closed in December, 2006 for which I owed about 36K in payroll taxes for. I sold my home in December, 2007 (it was in foreclosure) & the mortgage company paid the IRS 10K of those taxes leaving about 28K (w/ penalties/interest). I have not found employment which enables me to make payments. Do I have any options available ?

  5. Neil Lewis says:

    I owe the IRS about $200,000 in 941 withholding taxes. They have taken a lien against my checking account. I am attorney and earn decent money but I am also in the rela estate business and the last several years have wiped me out. I have no cash and all money coming in is keeping the real estate debts up, but that hasn’t been enough and I have $12,000,000 in real estate in recievership. The IRS is squeezing and is ready to go after me personally. Do you have any suggestions

  6. cliff says:

    Does this apply to taxes owed on w-2 income as well? How do you get the CNC status ?

  7. garnik says:

    Intriguing article. Has he written about other IRS codes that protect individuals?

  8. RB says:

    I would like to know more about CNC and how someone would get on that list. Please have your expert provide us with that information.

    Thank You!

  9. Clark Wykert says:

    How do you get on the Currently Not Collectible status with the IRS? They have collected from my Social Securty check for years. I owed them Payroll taxs and was “technically insolvent” as
    I have not had enough income to pay Income taxes.
    I had to file for Bankrupty.
    Please any help or advice would be great.
    Thank you for any attention to this matter.
    Clark Wykert
    proffcdw@juno.com

  10. Julius Lucas says:

    Hello I finf this info very interesting where can I get the forms like the CNC status.

  11. Sven says:

    How do you qualify as Currently Not Collectible?

  12. Linda says:

    The IRS froze our bank account, and then took it all. Right before Thanksgiving. I talked to them for hours. No budging on their part. Even though we are both unemployed. They took every cent we had. I was told we could not claim hardship, because we are non-compliant. Even though we have been left lower than poverty level. In fact we may be homeless in a month. I contacted a tax defense outfit. They wanted $1,400 just to get started. I had/have no money to pay THEM.
    I hope that I have internet access next month.
    We are in our late 50′s and finding a job is not an easy task these days. I have submitted 100′s of resumes. Do we have any recourse in getting our money back? What part of hardship do they not get? Down and out in L.A.
    Linda

  13. robert lee darby says:

    i settles a $20.000 creadit card, i payed them 10.000 dollars in one year , will i have to pay the irs the other 10,000 dollars

  14. Luis S. Munoz says:

    I have some student loans from the 80′s I finished my education qhen I was in my fifties. I owe about 6-7 grand in student loans but with the accrued interest is over 22K by now. I am too old to get a proper job now, and the Social Security Dept. is telling me that they will take that money out of my meager chech. How can I fight this. If they take part of my monthly check I am going to be in a terrible situation.

  15. julio says:

    If i owe IRS 55K and file OIC and get denied i can still apply for
    CNC? If i call local IRS office will they send me CNC application?

  16. Jerry says:

    WILL the IRS or, CAN the IRS 1099 someone who has defaulted or ( QUIT-paying )> not paid off their creditcards ( WITHOUT settling ) with the creditcard companies?

  17. Steve says:

    What happens when you do get an OIC and make payment arrangements for it (which I am doing and current on) but end up owing more taxes one year that you can’t afford to pay. ie: on unemployment all year with no taxes taken out. To my understanding, if I can’t pay what I owe in taxes next year in full, I will lose my OIC and owe the original amount. I do not want that to happen, but don’t see a way to pay off the OIC before taxes are due next year. Anything out there that may help me? (oh, and as a side note, isn’t going CNC just delaying the inevitable? You’ll still eventually end up owing the taxes Plus penalties/interest)

  18. Luigi Schiavo says:

    What can one do to prevent the IRS from attaching ones Social Security benefits of up to 15%?

  19. Howard Walter says:

    We need to go to flat tax like Russia has done. This would make things alot easier.

  20. Dee says:

    1. I have read (doesn’t mean it’s true…?) that there are some circumstances where following an offer and compromise settlement, the IRS has reserved the right to go after the taxpayer’s future income if it should ever significantly increase. Is this true, and if so, what are the differences between cases where an O & C settlement is final, complete, and forever “put to bed” versus the cases where the IRS can chase any future increase in income the taxpayer might someday make?

    2. I personally know of a horror story where a long established debt settlement company that advertises heavily has lost several years of the client’s original tax records and refused to refund the client’s stiff upfront fee or compensate the client in any other way. Since there are countless attorneys and companies who advertise their expertise in handling, negotiating and settling debts to the IRS (presumably via an O & C), how can one distinguish between the competents and the pretenders?

    3. Arnold Goldstein’s twenty dollar 2007 book, titled “How to Settle with the IRS for Pennies on the Dollar,” has mostly 5-star reviews on Amazon.com. Is the attraction of being able to use such resources inexpensively and satisfactorily on a do-it-yourself basis realistic, or is that more of a delusion and a snare?

  21. fran says:

    I will probably have a large IRS bill when they finally come after me. Lost ALL my properties in the big decline of 2007, as I am a small time real estate investor. I have not worked in over three years and have no assets! Have not gotten a letter, but have not filed taxes either…any suggestions? thanks

  22. Wayne says:

    Are there any circumstances where the cancellation of debt is done on a single family rental property.

  23. Vic Prodehl says:

    CNC status is the most little-known and powerful part of the tax code. It is amazing because in many cases you can earn a pretty high income and the IRS can’t touch you.

    Please expand upon the above thought more fully so that I can see if this maybe a something worth pursuing.

  24. Vic Prodehl says:

    Tell me how the CNC arrangement operates.

  25. john fitzhugh says:

    Right now I owe the IRS for several tax years,some I have paid off by way of my tax refunds that I would have received. The IRS has also included my wife in my tax debt. The amount that I owe is around 60,000 and this is from withdrawing my 401k earlier, and from a settlement that I received. I am currently on the IRS unable to collect list, but I still need my tax return to help pay other outstanding bills that I have. What can I do about this situation?

  26. Reginald says:

    This is very interesting. What effect, if any will the CNC Status have on a credit report?

    Thank You

  27. janet anderson says:

    Richard – Is there any hope for my daughter and family to have a 1099 from their former primary residence foregiven? They bought an investment home while living in VA. My son-in-law was transferred from Stafford, VA to Richmond with BK of AM. Less than a year later he was layed off. They had the 2nd house back in Stafford, so they were able to sell their new home in Richmond and get out from under that, and moved back to Stafford. They stayed in that house (#1)1 year while he looked for work. He gave up in Norther VA and they rented that house moving to Orange Park FL near me. He was unable to get a stable job here for quite a while and they lost that house which was their primary residence while he was still looking for work. Would this qualify them as ‘technically insolvent’ at the time of the short sale? to make matters worse, they paid $425K for, put $86K down then lived in it. They financed $350Kish, sold it for $260Kis and will get a 1099 for the balance! It has not been easy for them since this began. Any thoughts or recommendations? thanks – Janet

  28. Brian Pekrul says:

    Do you know of a Canadian equivalent to this matter? Or know of someone who is knowledgeable of Canadian Law reguarding this subject? Any information would be much appreciated not for myself personally, but for family and friends. Thank You

  29. Alice says:

    When is this webinar going to be held?!?

    I’ve been waiting for this; I don’t want to miss it!

    Thanks,

    Alice

  30. Janet Reid-Bills says:

    How do you go about getting CNC status. Thanks.

  31. Janet Reid-Bills says:

    How do you go about getting CNC status? Thanks.

  32. Mike Rogers says:

    Have a friend who hasn’t paid filed income taxes in 16 years. What route should she take to
    make things right with the IRS?

  33. Gary Schnabel says:

    I was audited a few years back and owe the IRS a lot of money. Since then I have lost our house to forecloser and my wife and I were both unemployed for a while.
    The IRS did not accept my offer in compromise because I did not send in the $150 payment with it…we did not have the money to send it in at the time.
    We have both started drawing our SS and we cannot pay them. I have gotten a job in a grocery store and started at minimum wage..I have been working there for 10 months. My wife is still unemployed. They did give me a reprieve for a year. I would like to get this behind me once and for all.

  34. robert says:

    Richard,

    I settled my debt with all credit card companies in 2010. I was told I would have to pay taxes on the amount forgiven only if I receive a 1099-C. However, the IRS also told me that if I don’t receive a 1099-C, then I do not owe the IRS for the forgiven debt. How will I know if I am going to receive a 1099-C? Do I receive one if the credit card company files with the IRS? I am guessing I would not receive a 1099-C if the credit card company wrote off the debt and did not file with the IRS? Is there a way to check if I am going to receive a 1099-C or do I just pray it never comes? I do not enjoy getting blindsided and would rather know the truth.

    Thank you,

    Robert

  35. dave says:

    went through 6 bk biz and personal lost all my biz assets 4 properties went to irs had 50 k left after p[aying bills they said i still owed 250k because i was on single entry system no deductions i thought i could write off a couple of million of income they said no they cleaned out bank accts a couple of time its been 18 years now id like to get this fixed and go back to making some money instead of surviving no more notes from them i havent filed in 20 years bill is probably 1.5 million now

  36. james says:

    if I owe money to the irs for back taxes, and as of today have been out of work for over two years and had to file bankrupcty are the taxes taken off,and can I keep my house,and are the property taxes gone or what? your help will on this will save me!

  37. John Dont says:

    any chance there may be some relief coming for premature IRA/401k withdrawals where the tax payer is struggling through economic adversity?

  38. ak says:

    1.wHAT FORMS ARE NEEDED TO START THE cnc status process? and where do I send the forms?

  39. C. Tognotti says:

    I discovered IRS bureaucrats are happiest when they bury a business owner so deep they can’t recover. Unless, of course, you happen to be in Congress, and helped write the rules.

    Top dog in finance and IRS rule writing, Dem Rep. Charlie Rangel, just got rip-roaring applause from Dems when Pelosi read off just one illegality for his sanction, i.e. for non-payment of taxes on renting his Dominican Republic mansion for years, nevermind misuse of rent controlled U.S. properties and congressional staff for personal business, lying to congress . . .
    Perhaps, Mr. Rangel “I-do-not-feel-an-ordinary-citizen” should be interrupted from his New Year’s vacation in the tropics to instruct us on how we too can avoid going broke and losing all we’ve worked our lives for–and get a get-out-of-jail-free-card, a multi-millions dollar retirement pkg for bilking the public and an ovation from the Dems to boot!

  40. Lauren says:

    Geller’s course sounds good– I could have used it 4 yrs ago when 10k was swept out of my mom’s account– and she a widow of a life long civil servant! Recently, I helped a friend fight on multiple fronts– 4clo; insurance– by using the in depth but quick course by an attorney– jurisdictionarydotcom. That’s not an affiliate link. It can be grokked in a weekend and is low enough cost to be put on a relative’s credit card if need be.
    People using it have won against large corp, govt, hospitals. it is the best if you have to do it yourself, and also to watch your attorney.
    Make an intention daily, go with your gut on timing of every little thing; ask simply for the right person to be on the phone; no shame. Urbansurvivaldotcom on the big picture underneath econ, w/ no political agenda. (Makalary@hmamail.com if you wish. But that is a disposable email for only 2 weeks. luck.)

  41. Maureen says:

    My husband and I have a small family run business and have had a hard time paying all of our bills. We owe sales tax to the IRS for the past 2 years. I was not able to pay it due to all the other bills that needed to get paid so that we could survive. Do you have any help for us. Will the CNC form help us? we must owe a minimum of $40,000.

  42. Joi says:

    I have a friend that, in her divorce over 20 years ago, was stuck with an $800 tax bill. Thinking her ex-husband paid it, she received letters from the IRS years latter with interest and penalties. From that point on she quit filing her tax returns in fear of the IRS taking everything she owned. Now the tax bill is in the hundreds of thousands and she’s getting letters from the IRS again. What can she do?

  43. teresa mardorf says:

    want to be invited to insider only webinar call offered on todays call.

  44. JEAN RATH says:

    OWE $90000, IRS HAS GARNISHED 80% OF MY RETIREMENT PENSIONS. ALSO, 15% OF MY SOCIAL SECURITY. I CANNOT PAY MONTHLY BILLS, CANNOT PAY TO MOVE TO LESS EXPENSIVE HOUSE (RENTAL), CANNOT KEEP UTILITIES ON, ETC. I HAVE NO CASH OR SAVING, NO ASSETS (CAR WORTH <2000, OWE 9000), NO OTHER ASSETS EXCEPT MY RETIREMENT INCOME.

  45. Steve says:

    Looking forward to more info on this subject.

  46. sandra says:

    This is exactly what I need right now!! This year the bank took my rental, and I expect they will take my other, mostly primary house for the last16 years even though we’re in a trial modification. They have no intent on continuing with the permanent mod since they were so difficult to convince that since we are currently paying, they shhould cancel the sale. No deal for these heartless thieves. I really look forward to some relief, so thank you for making any and all helpful information available to us, the real live people and families who are suffering and losing so much due to greed!

  47. jak says:

    looking forward to your great information,keep it coming.thanks

  48. Douglas McPhail says:

    This is outstanding information!!! What is necessary for CNC status.

    Doug

  49. How to find out about college student loans that are overdue (payments). Is there anything relevant to this situation that could apply to my overdue situation. Thanks Sky

  50. Jess Aragon says:

    NEED THIS INFO. NOT BARKING AT MY DOOR YET, BUT WANT TO BE PREPARED IF NECESSARY.

  51. pamela says:

    i tried for months to get a transcript, but they kept sending letters that i always needed to do something else–till i finally gave up–how do you get yours???

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