Practice & Procedures
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 126.96.36.199.
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 §188.8.131.52(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 §184.108.40.206.7).
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 uncollectible 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 proprietorships, 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 §220.127.116.11.9). 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 §18.104.22.168(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 §22.214.171.124.1).
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:
- The taxpayer's age and employment status;
- Number, age, and health of the taxpayer's dependents;
- Cost of living in the area where the taxpayer resides;
- Any extraordinary circumstances such as special education expenses, medical hardship, or natural disaster; and
- Whether the taxpayer would suffer an economic loss if forced to move.
According to IRM Section 126.96.36.199.9(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:
- The taxpayer has a terminal illness or excessive medical bills;
- The taxpayer is incarcerated;
- The taxpayer's only source of income is Social Security, welfare, or unemployment; or
- The taxpayer is unemployed with no source of income.
For accounts where the aggregate unpaid balance of assessment is above $100,000, the following additional verification is required under IRM Section 188.8.131.52.9(8):
- Full credit report on individuals. The IRS employee must ask the taxpayer to provide a copy of the credit report before the IRS employee orders one. An IRS inquiry on a taxpayer's credit report will affect the taxpayer's credit score. (Not all IRS employees are aware of this new IRM provision.)
- Motor vehicle records.
- Courthouse record check, online or in person, for real or personal property ownership.
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.
Strategy for Using Hardship Closing Codes 24–32
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
Hardship accounts will remain in CNC as long as the total positive income (TPI) remains below or equal to the closing hardship code that is based on the taxpayer's total allowed annual living expenses. The taxpayer's TPI is reviewed annually when the taxpayer files his or her income tax return.
According to IRM Section 4.1.7 (Exhibit 4.1.7-1(31)), TPI includes positive values from the income fields listed below (losses are treated as zero).
- Other income;
- Schedule C (net profits); and
- Schedule F
Example 2: A taxpayer has fallen on hard times but expects to land on his feet shortly. The taxpayer's allowable annual expenses are $62,000 when the account is placed in CNC. The closing code is 30. The account will come out of CNC automatically when the taxpayer files a return with income of more than $68,000.The account should remain in CNC as long as income does not exceed $68,000.
When a new tax period becomes due after the initial CNC determination, the new account may be reported CNC without further investigation if the prior CNC determination is no more than 12 months old (IRM §184.108.40.206.3). An NFTL determination is required per IRM Section 220.127.116.11.2.
The following exceptions require a new CNC determination within the 12-month period:
- Trust fund taxes that require a trust fund recovery penalty determination or that accrued after the date of the prior CNC determination.
- Cases closed as in-business CNC where the taxpayer has incurred subsequent liabilities (IRM §18.104.22.168.7).
- Prior bankruptcy (cc 07) dispositions.
- The taxpayer has a new address, and the case was reported as CNC unable to locate or unable to contact.
- When a case was closed as shelved. "Shelved" means that the case was closed by the IRS employee without being investigated.
Letter 4223 or LTR 4624C, Case Closed—Currently Not Collectible, will be issued to the taxpayer when a case is closed as CNC due to hardship. The letter states the type of tax and the periods that are temporarily closed because the government determined that the taxpayer cannot pay. The letter states that the government may reopen the case in the future if the taxpayer's financial condition improves. The letter states that interest and penalties will continue to accrue. It also reminds the taxpayer to remain in tax compliance and file and pay future taxes. CNC status does not toll the 10-year collection statute of limitation in Sec. 6502(a).
The following case study shows how a CPA firm might handle a client's situation to convince the IRS to resolve a case as CNC with no further collection action.
Example 3: S is elderly and not in the best of health. He owes the IRS more than $100,000 for individual income taxes, which were incurred in 2008, 2009, and 2010, and trust fund recovery taxes that were incurred in 2007. S has no assets of substance, except for a checking account with $3,000 and a vehicle with 80,000 miles. The income earned in 2008, 2009, and 2010 was used to pay for his ordinary and necessary living expenses. His current source of income is Social Security of $2,500 per month. His monthly allowable expenses are $3,000 per month. He receives approximately $750 per month from his children.
S received Notices CP71A, Amount Due, dated Nov. 10, 2014, and CP504, Amount Due Immediately—Notice of Intent to Seize (Levy) Your State Tax Refund or Other Property, dated Nov. 17, 2014. The notices stated only the Form 1040 liability. On March 16, 2015, S received Notice CP91, Amount Due Immediately—Intent to Seize Up to 15% of Your Social Security Benefits, related to the liability for individual income taxes.
In response to S's situation, on Dec. 16 his CPA's firm sent the following letter to the IRS service center that had issued Letter CP504:
We request that the account be placed in uncollectible status using a closing code of 27. S is in financial hardship. Enclosed find my Power of Attorney, which will allow me to representS .
We are in receipt of Notices CP504, dated 11/17/14, and CP71A, dated 11/10/14. We respectfully request that the 1040 for 2008, 2009, and 2010, along with the Civil Penalty in 2007 be placed in uncollectible status. S is currently not working and is 88 years old. S is not in the best of health. S's sole source of income is his Social Security benefits.
Enclosed find Form 433-A along with a letter dated 12/1/14 from S's doctor stating that S is not in the best of health. S's annual allowable living expenses are $36,000. We expect that the living expenses will increase in 2015 due to S's declining health, while his future income will remain stagnant.
On March 16, 2015, the CPA firm received a Notice CP91. The firm contacted the IRS service center on March 16, 2015, and asked to speak to a manager. After waiting more than an hour on hold, the firm was informed that a manager was not available and that one would call the firm back within two days. The call never came.
The firm prepared and on March 18 filed by certified mail Form 9423 to the service center that had initiated Notice CP91, to stop collection action and to place the account in uncollectible status. The following letter accompanied the form:
Enclosed find Form 9423 "Collection Appeal Request," in response to CP91, dated 3/16/15. We respectfully request that the account be placed in uncollectible status. On March 16, 2015, we spoke to L, ID #1, and requested a call back from a manager regarding notice CP91, dated 3/16/15, that we received from the Service Center. We were informed by L that we would receive a call back from a manager within two days but did not receive the call back, as indicated on line 15 of Form 9423.
A levy on S's Social Security benefits will cause a financial hardship.
We respectfully request that the account be placed in uncollectible status using closing code number 27. S is in financial hardship. S is in poor health, and his sole source of taxable income is Social Security benefits.
We wrote the Service Center on 12/16/14, copy enclosed, and did not receive a response. Enclosed find Form 433-A along with a letter from S's doctor that was submitted to the Service Center on 12/16/14.
S is in financial hardship. S's monthly Social Security benefits are $2,500, and his monthly allowable expenses are $3,000 per month.
|Author Larry Wolfe is with Larry J. Wolfe Ltd. Certified Public Accountants in Skokie, Ill. Column editor Valrie Chambers is an associate professor of accounting at Stetson University in Celebration, Fla. For more information about this column, contact Prof. Chambers at firstname.lastname@example.org.|