Uncollectible status: an alternative resolution.

• Author: Wolfe, Larry J.
• Position: Tax collection

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:

1. Reporting accounts receivable as currently not collectible--General

2. 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.

3. Hardship

4. 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.

5. 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 5.16.1.2.

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 fifing of an NFTL when the taxpayer can document that the NFTL will hamper collection. The determination to defer fifing 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 [section] 5.12.2.4(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 fifing 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...