The Pros and Cons of Uncollectible Status

Posted by Siegel Tax Law on August 26, 2013

The Pros and Cons of Uncollectible Status

If a taxpayer is in serious financial hardship, the IRS can classify the tax as Currently Non-Collectible, suspending all collection action.  This means that the taxpayer will not be required to make any payments for a year or two if the taxpayer remains compliant with all other federal tax obligations, such as filing returns on time.  Any new tax accrual or unfiled return can trigger a quick transfer the case back to IRS Collections.

The obvious benefits of Uncollectible Status are that it will buy time with the IRS and the 10-year collection statute of limitations continues ticking.

But Uncollectible Status has drawbacks.  Penalties and interest continue to accrue and when the IRS revives the case in Collections the debt will be significantly higher.

I think the best thing to do after acquiring Uncollectible status is to promptly submit an offer in compromise.  The best time to owe money to the IRS is when the taxpayer is broke.  If a Revenue Officer has already concluded that your client is in such hardship that he or she cannot pay their taxes, there is a fair chance an offer in compromise would be successful, and the taxpayer can get rid of the debt forever.