Living on Social Security Alone and Owing the IRS

A lot of retirees carry an old tax debt from their working years. A business that failed. A 401(k) cashed out during a layoff. Years when nobody filed. Now the only income is a Social Security check, and the IRS letters keep coming.

Here is the truth. The IRS cannot collect money you do not have, and the law requires it to stop trying when collection would leave you unable to meet basic living expenses. You just have to show it.

What currently not collectible means

Currently not collectible, or CNC, is an IRS account status. The procedures are in IRM 5.16.1. When the IRS determines you cannot pay, it reports the account as currently not collectible. The debt still exists. But active collection, including levies, generally stops.

The legal backbone is IRC 6343(a)(1)(D) and Treas. Reg. 301.6343-1(b)(4), which require the IRS to release a levy that causes economic hardship, defined as being unable to pay reasonable basic living expenses. A hardship CNC closure is how the IRS formalizes that conclusion.

A hardship closure is also one of the codes that removes your account from the Federal Payment Levy Program, which means it stops the 15 percent Social Security levy. See the IRS 15% Social Security levy explained.

How the IRS decides

The IRS compares your monthly income to your allowable monthly expenses. Expenses come from the Collection Financial Standards, which have three parts:

• National Standards for food, clothing, housekeeping supplies, personal care, and miscellaneous.
• Out-of-pocket health care, a national figure that is higher for people 65 and older.
• Local Standards for housing and utilities by county, and for vehicle ownership and operating costs by region.

Health insurance premiums, including Medicare premiums, are allowed in addition to the out-of-pocket standard. Court-ordered payments and current tax payments are allowed. Details on medical costs are in Medicare premiums and medical costs on IRS financial forms.

If your income minus allowable expenses is zero or close to it, and you have no assets the IRS could reasonably reach, you are a CNC candidate.

What you submit

Usually Form 433-F, Collection Information Statement, and sometimes the longer Form 433-A. Expect to provide:

1. Your Social Security benefit letter or recent bank statements showing the deposit.
2. Any pension or annuity statement.
3. Three months of bank statements for every account.
4. Your lease or mortgage statement, utility bills, and insurance bills.
5. Medicare premium notices, supplemental insurance bills, and pharmacy receipts.
6. Statements for any IRA or 401(k), even if small.

Report gross Social Security, before the Medicare Part B premium is deducted, and list the premium as an expense. Reporting the net deposit and also listing the premium double-counts it. Reporting the net deposit and forgetting the premium undercounts your expenses. Either error can make the numbers look wrong to the IRS.

What about retirement savings?

If you have an IRA, the IRS will ask about it. IRM 5.11.6.3 tells Revenue Officers not to levy a retirement account if you depend on it, or will in the near future, for necessary living expenses, and to use the Publication 590-B life expectancy tables to estimate how much you could withdraw each year to last your lifetime. A modest IRA you draw on to supplement Social Security is often treated as part of your income, not as a pot the IRS can take. See can the IRS levy your IRA in Florida?

A budget that shows the problem

Here is a simplified illustration. A widower in St. Petersburg receives $1,900 a month in gross Social Security. Medicare Part B comes out of the check. He rents a small apartment, pays for a Medigap policy and a Part D plan, and drives a paid-off car to doctor appointments. When you list his rent and utilities (capped by the Pinellas County housing standard), the national standards for food and personal items, the out-of-pocket health care standard for someone over 65, his insurance premiums, and vehicle operating costs, his allowable expenses meet or exceed his income.

That is a hardship case on its face. No negotiation tactics required. The numbers do the arguing, which is exactly how the regulation is designed to work. Your figures will differ, so build your own budget from your own bills.

Talking to the IRS

Many CNC requests are handled by phone with the Automated Collection System when the balance is modest and the financial picture is simple. The assistor will walk through income, expenses, and assets, and may ask you to fax or upload supporting documents. Larger or more complicated cases may go to a Revenue Officer who will want Form 433-A. Either way, answer completely, do not guess at numbers, and ask the employee to confirm the account will be placed in currently not collectible status before you hang up.

What CNC does not do

Being honest about the limits keeps you from getting blindsided.

• The debt does not go away. Interest and the failure-to-pay penalty continue to accrue, though the penalty is capped at 25 percent under IRC 6651.
• Refunds are kept. Under IRC 6402, the IRS will offset any future refund against the old debt.
• A lien may be filed. The IRS can file a Notice of Federal Tax Lien even while the account is CNC. See federal tax liens and retirement accounts.
• It can be reopened. The IRS periodically checks income. If your income rises, through an inheritance, a new pension, or a large IRA withdrawal, it may reactivate collection.

The clock keeps running

Here is the part that matters most for older taxpayers. Under IRC 6502, the IRS generally has 10 years from assessment to collect. CNC status does not stop that clock. For many retirees, CNC is not a pause before a fight. It is the end of the story. The collection statute expires, and the debt goes with it.

Be careful with anything that suspends the statute. A pending offer in compromise, a Collection Due Process hearing request, and a bankruptcy filing all toll it. Sometimes those are still the right move. Know the trade-off first. See the IRS collection statute in Pinellas.

Keeping CNC status

Three rules:

1. Do not create new debt. File every return on time. If an IRA distribution or part-time job creates tax, have it withheld. A new balance can reopen collection.
2. Keep your address current with the IRS using Form 8822, so notices reach you.
3. Keep your documents. If the IRS asks again in a year or two, you can answer in a day.

When CNC is the wrong fit

If you have meaningful income left over after expenses, the IRS will expect a payment plan instead. If you have significant assets, an offer in compromise or payment plan is more realistic. CNC is for people who truly have nothing left at the end of the month. Pretending otherwise fails the good faith test in the hardship regulation and makes everything harder later.

Next step

Write down your real monthly budget, gather the documents above, and request a hardship determination by phone or in writing. If you want someone to prepare the financial statement and make the call, phone (813) 229-7100. The firm's page on currently not collectible status has more detail.