July 13, 2017
Larry J. Wolfe, CPA
Larry J. Wolfe Ltd
Uncollectible status is discussed in 5.16.1 and 5.19.17 of the Internal Revenue Manual (IRM). An account that is placed in uncollectible status allows the taxpayer to remain current in tax compliance and not worry about enforcement action. Uncollectible status allows a taxpayer to pick himself off the ground, dust himself off and start walking again. An account may be designated as uncollectible status for short or long term. All cases are unique, dictated by the facts and circumstances.
Policy Statement 5-71, found in Section 1 of the IRM, provides the authority for reporting accounts Currently Not Collectible (CNC). Internal Revenue Manual Section 1.2.14 discusses policy statements for Collection Process Activities. 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, 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.
There are a number of reasons that accounts are placed in uncollectible status. The transaction code TC 530 appears on the Account Transcripts for accounts placed in uncollectible status. A closing coded (cc) is used by the IRS employee when placing an account in uncollectible status. The closing codes appear in IRM 22.214.171.124. A few of the reasons accounts are placed in uncollectible status are:
- Death of the taxpayer with no collection potential from the estate. (closing code 08)
- Taxpayer is unable to meet ordinary and necessary living expenses. (closed using a hardship code of 24-32)
- Partial or complete expiration of the statute of limitation for collection of the tax. (closing code 04 or 05)
- Inability to contact a taxpayer although the address is known and there is no means to enforce collection. (closing code 03)
- Business cannot pay back taxes but can remain current. (closing code 13)
- A corporation, exempt organization, or Limited Liability Company (LLC) where the LLC is identified as the liable taxpayer, liquidated in bankruptcy. (closing code 07)
An IRS employee is required to file a Notice of Federal Tax Lien (NFTL) Form 3172 on accounts being reported Currently Not Collectible “CNC” when the aggregate unpaid balances of assessments equal or exceeds $10,000.
A decision may be made to defer the filing of an NFTL when the taxpayer can support 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 126.96.36.199.3 (3), date of revision (11.09.15). An example would be a security dealer or a partner in a law firm could lose their employment if a Federal Tax Lien is filed against the individual.
As an alternative to prevent the Notice of Federal Tax Lien filing which is required if the case is determined to be “CNC”, the taxpayer could request an installment agreement of a low amount, $25 per month. Form 433-A and or Form 433-B may be required depending on the amount of the outstanding liability to support the monthly payment.
Another alternative, if you are unable to convince the IRS employee that the filing of a Federal Tax Lien would cause a financial hardship, would be to request a Collection Appeal Request “CAP” Form 9423, or a Collection Due Process “CDP” Form 12153, if applicable.
A case that is closed with a recommendation of currently not collectible generally requires the review and approval of the immediate manager. Acting Managers may be given authority to approve and close cases as “CNC”.
Accounts may be reported “CNC” when an operating corporation, exempt organization, or limited partnership cannot pay its back taxes and enforcement cannot be taken because the business has no accounts receivables or equity in assets. A financial statement, Form 433-B must be remitted. Taxpayers 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 188.8.131.52.7).
Operating businesses placed in “CNC” will be subject to a mandatory follow up within 18-24 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 a “NFTL” determination for the subsequent liability. If the additional liabilities are not resolved, the “CNC” account will be reactivated for collection action.
Example: A Church owes the IRS 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 is placed in “CNC” if the taxpayer demonstrates a financial hardship. Individual, Sole Proprietorships, General Partnerships, and an LLC may be placed in “CNC” as “Hardship” where an individual owner is identified as the liable taxpayer, IRM 184.108.40.206.9. The IRS employee will close a Hardship account using the closing codes 24-32.
Hardship exists if a taxpayer is unable to pay reasonable basic living expenses. Economic hardship is defined in 301.6343-1(b)(4) of the Internal Revenue Code as “unable to pay his or her reasonable basic living expenses”. The determination of a reasonable amount for basic living expenses will be made by the Commissioner and will vary according to the unique circumstances of the individual taxpayer. Unique circumstances, however, do not include the maintenance of an affluent or luxurious standard of living, IRM 220.127.116.11.1 (2).
The taxpayer’s income and basic living expenses must be considered to determine if the claim for economic hardship should be accepted. Basic living expenses are those expenses that provide for 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 and if it is determined that a standard amount is inadequate to provide for a specific taxpayer’s basic expense, a deviation of the standards may be allowed. The taxpayer is required to provide reasonable substantiation for the deviation, IRM 18.104.22.168.1 (4).
The taxpayer’s representative may have to strongly advocate for a deviation in the collection standards with the IRS employee because employees do not exercise discretion when applying the collection standards. Remember all employees have managers. Don’t be afraid to go up the ladder to the Group Manager or Territorial Manager.
The Internal Revenue Service Advising Council issued its Annual Report on November 19, 2014 and 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 need to maintain higher professional standards in their dress, appearance, and vehicle usage so that 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 stated that 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 taxpayers dependents,
- Cost of living in the area the taxpayer resides,
- Any extraordinary circumstances such as special education expenses, medical hardship, or natural disaster,
- Would the taxpayer suffer an economic loss if forced to move.
According to IRM 22.214.171.124.9 verification of a financial statement is not required if the aggregate unpaid balance of assessment is less than a certain amount. The certain amount is currently $10,000, and at least one of the following conditions must exist:
- 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.
- 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 will be required per IRM 126.96.36.199.9:
- Full credit report on individuals. The IRS employee is required to request that the taxpayer provide a copy of the credit report before the IRS employee orders the credit report. An IRS inquiry on a taxpayer’s credit report will affect the taxpayer’s credit score. Not all IRS employees are aware of the new IRM provision.
- Motor vehicle records.
- Courthouse record check, on-line, or in person, for real property ownership.
Good news for taxpayers! Internal Revenue Code 6343(e) requires the release, as soon as practicable, of a levy on wages when an account is placed in uncollectible status. IRM 5.11.2 states steps should be taken to accomplish the release immediately. Case histories must be reviewed by IRS personnel to ensure that wage levies are released prior to declaring an account uncollectible under hardship closing codes.
When a hardship determination is verified, a levy cannot be issued or left in place to force a taxpayer to file an unfiled return. Kathleen A Vinatieri v Commissioner, 133 T.C. No 392 (2009) discusses that IRS must release a levy when economic hardship exists and the taxpayer has unfiled tax returns. The case discusses code section 6343(a)(1)(D) regarding economic hardship and code section 301.63431(b)(4) which requires release of levy that creates an economic hardship regardless of the taxpayer’s noncompliance with the filing requirements.
Strategy pertaining to the use of hardship closing codes 24-32:
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. Exhibit 5.16.1-2 of the IRM discusses values associated with the hardship closing codes which corresponds 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 value of the hardship codes are as follows:
Code Total Living Expenses Allowed
Hardship accounts will remain in “CNC” as long as the Total Positive Income (TPI) remain below or equal to the closing hardship code which is based on the taxpayer’s total allowed annual living expenses. The taxpayers Total Positive Income (TPI) is reviewed annually when a taxpayer’s files an income tax return.
According to IRM 4.1.7 (Exhibit 4.1.7-1) Total Positive Income (TPI) includes positive values from the income fields listed below. Losses are treated as zero.
- Other Income
- Schedule C (net profits)
- Schedule F (net profits)
Imagine that- an Examination term (Part 4 of the Internal Revenue Manual) appearing in the Collection side of the Internal Revenue Manual (Part 5)!
An example of a case placed in hardship: A taxpayer has fallen on hard times but expects to land on his feet shortly. The taxpayer’s allowable expenses are $62,000 per annum 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 $68,000 or more. 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 188.8.131.52.3. A NFTL determination is required per IRM 184.108.40.206.2.
The following exceptions require a new CNC determination within the twelve month period:
- Trust Fund Taxes which require a Trust Fund Recovery Penalty (TFRP) determination or which accrued after the date of the prior “CNC” determination.
- Cases closed as in-business “CNC” where the taxpayer has incurred subsequent liabilities, IRM 220.127.116.11.7.
- Prior bankruptcy (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 closing letter will be issued to the taxpayer when a case is closed as “CNC”-hardship. The letter states the type of tax and the periods that are temporarily closed because the government determined that the taxpayer does not have the ability to pay. The letter states that the government may re-open the case if in the future if the taxpayer’s financial condition improves. The letter states that interest and penalties will continue to accrue. The letter reminds the taxpayer to remain in tax compliance and file and pay future taxes.
Now for a real case scenario:
Sam, age 88, in not the best of health, owes the IRS $100,689 for back Income Taxes (1040) which were incurred in 2008, 2009 and 2010 and Trust Fund Recovery Taxes that were incurred in 2007. Sam has no assets of substance except for a checking account of $3,000 and a vehicle six years old with 80,000 miles. The income earned in 2008, 2009, and 2010 was used to pay for Sam’s ordinary and necessary living expenses. Sam’s current source of income is Social Security of $2,500 per month. Sam’s monthly allowable expenses are $3,000 per month. Sam receives approximately $750.00 per month from his children. Sam received notice CP71A “Amount Due” dated 11/10/14 and CP 503 “Amount due immediately” Notice of intent to seize (levy) your state tax refund or other property dated 11/17/14. The notices only stated the 1040 liability. On 3/16/15 Sam received notice CP 91 “Amount Due Immediately” Intent to seize up to 15% of your Social Security benefits. (Only 1040 liability) How would you resolve Sam’s situation?
We wrote a letter to the Service Center that issued Letter CP 503:
LARRY J WOLFE, LTD
CERTIFIED PUBLIC ACCOUNTANTS
9933 LAWLER SUITE 105
SKOKIE, ILLINOIS 60077
847 675-7900 Tel
847 675-7902 Fax
December 16, 2014
Internal Revenue Service
Kansas City, Mo 64999
Re: Sam Man
Civil Penalties 2007
We request that the account be placed in uncollectible status using a closing code of 27. Mr. Man is in financial hardship. Enclosed find my Power of Attorney which will allow me to represent Mr. Man.
We are in receipt of Notices CP 503 dated 11/17/14 and CP 71A 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. Mr. Man is currently not working and is 88 years old. Mr. Man is not in the best of health. Mr. Man’s sole source of income is his Social Security benefits.
Enclosed find Form 433-A along with a letter dated 12/1/14 from Dr. Jawbone stating that Mr. Man is not in the best of health. Mr. Man’s annual allowable living expenses are $36,000. We expect that the living expenses will increase in 2015 due to Mr. Man’s declining health while his future income will remain stagnant.
Thank you for your time in this matter.
Larry J Wolfe
On March 16, 2015 we received CP 91, which states “Intent to seize up to 15% of your Social Security benefits” We contacted the Service Center and asked to speak to a manager on 3/16/15. After an hour and twenty minute wait we were told that a manager was not available and that we would receive a call back within two days. We did not receive a call back.
We prepared and filed by Certified Mail Form 9423 “Collection Appeal Request” on the second day to the Service Center that initiated Letter CP91, in order to stop collection action and to place the account in uncollectible status.
LARRY J WOLFE, LTD
CERTIFIED PUBLIC ACCOUNTANTS
9933 LAWLER SUITE 105
SKOKIE, ILLINOIS 60077
847 675-7900 Tel
847 675-7902 Fax
March 18, 2015
PO Box 219236, Stop P-4 5050
Kansas City, Mo 64141-9236
Sent by Certified Mail #1111111111111111
Re: Sam Man
Form 9423 “Collection Appeal Request”
1040 2008, 2009, 2010
Civil Penalty 2007
Enclosed find Form 9423 “Collection Appeal Request“ in response to CP 91 dated 3/16/15. We respectfully request that the account be placed in uncollectible status. On March 16, 2015, we spoke to Mr. Lien, ID #1 and requested a call back from a manager regarding notice CP 91 dated 3/16/15 that we received from the Service Center. We were informed by Mr. Lien 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 Mr. Man’s Social Security benefits will cause a financial hardship.
We respectfully request that the account be placed in uncollectible status using code closing code number 27. Mr. Man is in financial hardship. Mr. Man 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 Mr. Man’s doctor that was submitted to the Service Center on 12/16/14.
Mr. Man is in financial hardship. Mr. Man’s monthly social security benefits are $2,500 and his monthly allowable expenses are $3,000 per month.
Thank you for your time and patience in this matter.
Larry J. Wolfe
As of the due date of this article we have not had our Appeal Conference, but we are confident that we will be able to resolve this case as currently not collectible with no further collection action.