The IRS will designate a taxpayer's account as "currently not collectible" under certain circumstances, removing the account from its active inventory. Having an account placed in uncollectible status allows the taxpayer to remain current in tax compliance without worrying about enforcement action and allows a taxpayer to recover from a financial setback. The IRS may designate an account as being in uncollectible status for the short or long term. (Uncollectible status is discussed in Sections 5.16.1 and 5.19.17 of the Internal Revenue Manual (IRM).) All cases are unique—the facts and circumstances dictate the outcome.
IRM Section 1.2.14 contains IRS policy statements for collecting process activities, including accounts currently not collectible (CNC). Policy Statement 5-71 states:
Reporting accounts receivable as currently not collectible—General
If, after taking all steps in the collection process, it is determined that an account receivable is currently not collectible, it should be so reported in order to remove it from active inventory.
As a general rule, accounts will be reported as currently not collectible when the taxpayer has no assets or income which are, by law, subject to levy.
However, if there are limited assets or income but it is determined that levy action would create a hardship, the liability may be reported as currently not collectible. A hardship exists if the levy action prevents the taxpayer from meeting necessary living expenses. In each case a determination must be made as to whether the levy would result in actual hardship, as distinguished from mere inconvenience to the taxpayer.
Accounts are placed in uncollectible status for numerous reasons. The transaction code TC 530 appears on the account transcripts for accounts placed in uncollectible status. IRS employees use a separate closing code (cc) when placing an account in uncollectible status. The closing codes appear in IRM Section 18.104.22.168.
A few of the reasons accounts are placed in uncollectible status are:
Death of the taxpayer with no collection potential from the estate (cc 08);
The taxpayer is unable to meet ordinary and necessary living expenses (hardship ccs 24–32);
Partial or complete expiration of the statute of limitation for collection of the tax (cc 04 or 05);
Inability to contact a taxpayer although the address is known and there are no means to enforce collection (cc 12);
A business cannot pay back taxes but can remain current (cc 13); or
A corporation, exempt organization, or limited liability company (LLC) identified as the liable taxpayer liquidated in bankruptcy (cc 07).
An IRS employee is required to file a Form 668(Y)(c), Notice of Federal Tax Lien , and issue Letter 3172, Notice of Federal Tax Lien Filing and Your Rights to a Hearing Under IRC 6320 . A notice of federal tax lien (NFTL) is issued on accounts reported CNC when the aggregate unpaid balance of assessments equals or exceeds $10,000. A decision may be made to defer the filing of an NFTL when the taxpayer can document that the NFTL will hamper collection. The determination to defer filing the NFTL must be part of an agreed resolution that the deferral of the NFTL will both facilitate collection and be in the best interest of the government and the taxpayer (IRM §22.214.171.124(6)). An example would be when a security dealer or a partner in a law firm could lose his or her employment if a federal tax lien is filed against the individual.
If the practitioner is unable to convince the IRS employee that the filing of a federal tax lien would cause a financial hardship, an alternative would be to file a Form 9423, Collection Appeal Request, or a Form 12153, Request for a Collection Due Process or Equivalent Hearing, if applicable.
A case that is closed with a recommendation of CNC requires the review and approval of the immediate manager. Acting managers may be given authority to approve and close cases as CNC.
The IRS may report accounts as CNC when an operating corporation, exempt organization, or limited partnership cannot pay its back taxes and enforcement actions cannot be taken because the business has no accounts receivable or equity in assets. Taxpayers must remit a financial statement, Form 433-B, Collection Information Statement for Businesses, and may be asked to verify assets, encumbrances, income, and expenses. Income and expenses should be verified against tax returns, bank statements, and other financial information. The income and expense analysis must show that the taxpayer can pay current tax deposits but cannot make payments on back taxes (IRM §126.96.36.199.7).
Operating businesses placed in CNC will be subject to a mandatory follow-up within 18 to 24 months. If an operating business incurs subsequent liabilities while the account is in CNC, the taxpayer must be investigated to verify the taxpayer's current financial condition. The IRS employee is required to make an NFTL determination for the subsequent liability. If the additional liabilities are not resolved, the IRS will reactivate the CNC account for collection action.
Example 1: A church owes delinquent payroll taxes of $250,000. The assets are encumbered with a mortgage. The financial statements reflect that the church can remain current with tax deposits; however, it cannot remit back taxes. The account may be placed into noncollectable status until the financial status of the church improves. If the church does not remain in tax compliance, the account may come out of uncollectible status, and enforcement action can resume.
An account may be placed in CNC if the taxpayer demonstrates a financial hardship. A hardship closing code may be used only for individuals, sole proprietorship, partnerships where a general partner is personally liable for the partnership taxes, and LLCs for which an individual owner is identified as the liable taxpayer (IRM §188.8.131.52.9). The IRS employee will close a hardship account using the closing codes 24–32.
A hardship exists if a taxpayer is unable to pay reasonable basic living expenses. Regs. Sec. 301.6343-1(b)(4) defines economic hardship as a taxpayer's being "unable to pay his or her reasonable basic living expenses." The determination of a reasonable amount for basic living expenses is made by the IRS and varies according to the circumstances of the individual taxpayer. Such circumstances, however, do not include maintaining an affluent or luxurious standard of living (IRM §184.108.40.206(8)).
The IRS considers the taxpayer's income and basic living expenses in determining whether the claim for economic hardship should be accepted. Basic living expenses are those that provide for the health, welfare, and production of income of the taxpayer and the taxpayer's family. National and local standard expense amounts are designed to provide accuracy and consistency in determining the taxpayer's basic living expenses. National and local standards are guidelines. If the IRS employee making the determination finds that a standard amount is inadequate to provide for a specific taxpayer's basic expense, he or she may allow a deviation from the standards. The taxpayer is required to provide reasonable substantiation for the deviation (IRM §220.127.116.11.1).
The taxpayer's representative may have to strongly advocate on the client's behalf for a deviation from the collection standards because IRS employees typically do not exercise discretion when applying the collection standards. Representatives can appeal a revenue officer's decision to the group manager or territorial manager, if necessary.
In its annual report on Nov. 19, 2014, the IRS Advisory Council stated that many IRS collection employees do not exercise discretion when applying the standards. The report stated that "the collection standards . . . fail to adequately acknowledge that some taxpayers may need to maintain higher professional standards in their dress, personal appearance, and vehicle, so that for production of income, a realtor, corporate executive, or physician may have different 'necessary expenses' than an employee who is able to wear a work-provided uniform or drive a company-provided vehicle." The report also stated that the standards fail to account for the substantial variance in living expenses in various communities.
In addition to the taxpayer's living expenses, other factors to consider that impact the taxpayer's financial condition are:
According to IRM Section 18.104.22.168.9(6), verification of a financial statement is not required if the aggregate unpaid balance of assessment is less than $10,000 currently, and at least one of the following conditions exists:
For accounts where the aggregate unpaid balance of assessment is above $100,000, the following additional verification is required under IRM Section 22.214.171.124.9(8):
Some good news for taxpayers is that Sec. 6343(e) requires the release, as soon as practicable, of a levy on wages when an account is placed in uncollectible status. IRM Section 5.11.2 states the steps that should be taken to accomplish the timely release. IRS personnel must review case histories to ensure that wage levies are released prior to declaring an account uncollectible under hardship closing codes.
When the IRS verifies a hardship determination, it cannot issue or leave in place a levy to force a taxpayer to file an unfiled return. Vinatieri, 133 T.C. 392 (2009), says that the IRS must release a levy when economic hardship exists and the taxpayer has unfiled tax returns. The case discusses Sec. 6343(a)(1)(D) regarding economic hardship and Regs. Sec. 301.6343-1(b)(4), which requires release of a levy that creates an economic hardship, regardless of the taxpayer's noncompliance with the filing requirements.
IRS employees usually use the hardship closing code that most closely corresponds to the taxpayer's total annual living expenses allowed according to Form 433-A. The IRM discusses values associated with the hardship closing codes that correspond to the taxpayer's total annual living expenses allowed. The IRS employee should select a code that is not below the taxpayer's total annual living expenses. Where a taxpayer is undergoing unusual circumstances, or when a deviation in the standards is warranted, the taxpayer's representative should remind the IRS employee and request that a higher code number be used. The values of the hardship codes are shown in the exhibit below.