Many of the clients seek the assistance of the Tax Clinic after the IRS has not only assessed the tax liability, but begun the collection process, such as levying on their wages, social security or other government benefit. Once the IRS begins collection action, the taxpayer has several courses of action that will cause the IRS to suspend the collection action. These include submitting an installment agreement or an offer in compromise.
If an offer or installment agreement is not feasible, the IRS may agree to postpone further collection action informally but usually for no more than 30 days or it may formally determine that the account is “Currently Not Collectable” (“CNC”). Placing a client in CNC suspends all collection and enforcement activity. It also will cause the IRS to release any levy. Because an account is reported CNC on Form 53, in IRS jargon the Revenue Officer “53’s” the account.
Since the CNC status does not resolve the taxpayer’s underlying tax issue, the Tax Clinic works with the client to resolve the tax issue either through an amended return, audit reconsideration, installment agreement, or offer in compromise. CNC should be use as only a temporary solution.
Revenue Officers, Appeals Officers, and Settlement Officers may report accounts as CNC. Be aware that in many cases as part of agreeing to place an account in CNC, the IRS may file a Notice of Federal Tax Lien. This is more likely to be done for cases with a balance due over $10,000. 2011 TNT 38-2.
Upon a determination of CNC status, the Service will immediately release any levies on wages or salary. I.R.C. § 6343(e); I.R.M. 184.108.40.206.9(7). However, since offsets from Social Security, Disability Payments or other federal programs may not occur until the next month. In hardship cases, you can submit a Form 911 to the local Taxpayer Advocate requesting refund of the levied upon amount. In doing so, the burden is on the taxpayer to show that it is indeed a hardship. Usually, the Taxpayer Advocate will require a completed and signed Form 433 A or 433 F (collection information statements (“CIS”)) to accompany the Form 911. As a practice in the Tax Clinic, you must prepare a memorandum explaining the hardship and discussing the items on the 433 A or F. Use a sample memorandum for an OIC in structuring your memorandum.
While the IRS Manual provides several reasons why an account should placed in CNC status, the most common is that collection would create an economic hardship. This determination follows the review of the CIS. If the taxpayer does not have assets that can be used to pay the debt and his expenses equal or exceed his income, the matter is suitable for CNC status. Other reasons for placing an account in CNC include:
· Expiration of the statutory period for collection
Expiration of the statutory period for collection or suit initiated to reduce tax claim to judgment
· Inability to locate the taxpayer or assets
Inability to contact a taxpayer although the address is known, but there are no means of enforcing collection
· Suspension of corporation business activities and no assets remaining
· A corporation liquidated in bankruptcy
Death of an individual with no collection potential from an estate or no collection potential for estate taxes
Collection of the liability would create an undue hardship for taxpayers by leaving them unable to meet necessary living expenses.
A corporation remains in business and has paid its current employment taxes, but is unable to pay back taxes.
Corporate income tax liabilities owed by a financial institution certified as insolvent by the Office of the Controller of the Currency or the Office of Thrift Supervision
Special actions, such as accounts on military personnel in a designated combat zone I.R.M. 220.127.116.11(2).
Practice Tip: What the taxpayer may view as a hardship, the IRS may view as mere inconvenience. “Significant hardship means a serious privation caused or about to be caused to the taxpayer …. Mere economic or personal inconvenience to the taxpayer does not constitute significant hardship.” Reg. § 301.7811-1(a)(4)(ii).
The reporting of an account as CNC does not affect the validity of the underlying tax assessment. The tax is not forgiven or compromised and interest and penalties continue to accrue. If the IRS files a notice of federal tax lien (“NFTL”), it remains in force. In addition, the IRS’s computers are programmed to notify the field collection function when the taxpayer’s income increases significantly or when the expiration of the SOL on collection is imminent. I.R.M. 18.104.22.168 (mandatory and systemic follow up).
During the period the account is in CNC status, the IRS will automatically offset any future refunds due the taxpayer against the delinquent tax liability. Many accounts that are in CNC are eventually satisfied by refund offsets or by operation of the federal tax lien when the taxpayer sells property. If the taxpayer is an employee, he should be advised to fine tune his Form W-4 withholding statement to ensure that he does not over-withhold taxes.
CNC is not a permanent status. You should counsel the client that failure to file future returns and pay future required taxes may cause CNC status to be revoked