There are 3 types of deferral programs available to U.S. taxpayers: Currently Not Collectable (CNC or Status 53), negotiated 30 to 120 extensions to full pay, and negotiated 12 month lifestyle adjustment installment agreements (IA).
The most common deferral that is used is CNC status. CNC status is essentially stating that it unlawful for the IRS to enforce collections or force a taxpayer to repay their tax debt at this time due to there current financial situation. When you are applying for CNC status with the IRS what you must show to the IRS is that the income you are currently bringing into your household is less than your current bills.
What normally eliminates CNC status for taxpayers is that their expenses exceed the national living standard the IRS will give you credit for. Another question that I am commonly asked is if CNC status will last forever; CNC status typically can protect you from 18-24 months from the IRS. The IRS will evaluate your income level on your tax returns to determine if your income level has increased enough that you would not be able to make some type of payment to the IRS. When placed into CNC status, the IRS will place a “lock code” on an income level and once you exceed that mark you will automatically be removed from CNC and open again to IRS collections. Hiring an Enrolled Agent to help you negotiate your CNC status can benefit you by getting your “lock code” placed at a higher income level, so that you are not removed from status 53.
So what happens to those who can’t currently get into CNC status but also can’t afford a payment to the IRS? I have dealt with many clients who are making a terrific income but are still living paycheck to paycheck, and state they cannot afford to make any payments to the IRS. Normally, with these clients, after some financial investigation, you find that they typically have house payments/utilities that greatly exceed the normal standard. Sometimes, this is because of getting a bad house loan or just making bad financial decisions. An Enrolled Agent can help you in this situation by helping you negotiate what is known as a lifestyle adjustment. When trying to negotiate a lifestyle adjustment what you are trying to do is get the IRS to accept your current bills and expenses.
The IRS sometimes will accept your actual expenses for one year to give you time to either sell, move, or adjust your expenses down to an “acceptable” level with the IRS. If you do get a lifestyle adjustment with the IRS your best situation is going to be to find a way to full pay your tax liability, or ensure that you have made the necessary moves to get within the standards. This is important because the IRS is going to ask for a monthly payment of your entire MDI calculated back to the national standards. For example, if you are making $5000 a month and your current expenses are $4800, then for one year your payment would be $200 a month. But, after your one year adjustment if you are still making the same income, the IRS will now only give you credit for $3000 in expenses and request a payment for $2000 a month.
When trying to determine if getting some type of deferral program is going to be in your best interest consulting with a professional who knows your rights and the IRM.