Currently not collectible status: hardship, closing codes and reactivation

What CNC is

CNC is an administrative decision to stop active collection on an account. IRM 5.16.1.1.1 frames it as a balance between the potential for collection and the cost and ability to collect. The authority is Policy Statement 5-71, and the IRS records the decision with transaction code 530 and a closing code describing why (IRM 5.16.1.2). The liability remains; only the collection activity stops.

CNC comes up three ways in practice: the taxpayer asks for it, the financial analysis for an installment agreement shows no ability to pay, or a revenue officer concludes it during a field investigation. IRM 5.14.1.4 tells employees that if analysis shows the taxpayer cannot pay but insists on making payments, they should consider CNC and tell the taxpayer no payments are required while in CNC.

The hardship test

IRM 5.16.1.2.9 states the test directly: “A hardship exists if a taxpayer is unable to pay reasonable basic living expenses.” The definition comes from the levy release rules. IRC 6343(a)(1)(D) requires release of a levy when “the Secretary has determined that such levy is creating an economic hardship due to the financial condition of the taxpayer,” and Treas. Reg. 301.6343-1(b)(4) says that condition applies “if satisfaction of the levy in whole or in part will cause an individual taxpayer to be unable to pay his or her reasonable basic living expenses.” IRM 5.15.1.2 adds that the reasonable amount varies with the taxpayer's unique circumstances but does not extend to maintaining an affluent or luxurious standard of living. The regulation lists what the IRS weighs: age, employment status and history, ability to earn, dependents, and the amounts reasonably necessary for food, clothing, housing, medical expenses, transportation, current tax payments, court-ordered payments and the costs of producing income.

The Tax Court has read these rules strictly against the IRS. In Vinatieri v. Commissioner, 133 T.C. 392 (2009), a CDP case, the settlement officer's own notes said the taxpayer met the IRM hardship criteria, but Appeals sustained a wage levy because she had unfiled returns. The court held that IRC 6343(a)(1)(D) and the regulation “require release of a levy that creates an economic hardship regardless of the taxpayer's noncompliance with filing required returns,” and that proceeding with the levy was an abuse of discretion. The IRM now says the same thing (see the unfiled returns point below).

The analysis uses the taxpayer's income, allowable expenses under the Collection Financial Standards, and equity in assets. IRM 5.16.1.2.9 notes these cases generally involve no income or assets, no equity, or insufficient income to pay without hardship, and warns: “An account should not be reported as CNC if the taxpayer has income or equity in assets, and enforced collection of the income or assets would not cause hardship.” Equity that the IRS decides not to pursue must be explained in the case history.

Financial statement and verification

A collection information statement is generally secured before reporting an account CNC, and “The CIS supporting a CNC determination is considered current if it is less than twelve months old.” Hardship determinations rest on Form 433-A or Form 433-B (campus functions use Form 433-F). See collection information statements.

Under certain conditions no CIS is needed at all. Where the aggregate unpaid balance, including prior CNCs, is below a threshold the public IRM redacts, IRM 5.16.1.2.9(6) allows CNC without a CIS if at least one of these 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.
• The taxpayer is unemployed with no source of income.

The employee still needs documentation if internal sources such as IRPTR and RTVUE do not confirm the circumstance. As the balance rises, verification increases in tiers: online locator services and return review, then motor vehicle and courthouse property records and FATCA data, then a full credit report, FinCEN research where an FBAR was filed, and exam or criminal investigation files. The dollar breakpoints for each tier are redacted.

Unfiled returns do not automatically block CNC. IRM 5.16.1.2.9 allows hardship CNC if the CIS can be verified even with unfiled returns, and adds a firm limit on leverage: “If a hardship determination is verified, a levy cannot be issued or left in place to persuade a taxpayer to file.”

Closing codes and the reactivation trigger

Hardship accounts close with codes 24 through 32. Each code carries an income value, and the account reactivates systemically if the taxpayer's total positive income (TPI) on a later return exceeds it. Exhibit 5.16.1-2 lists the values:

The employee uses the code that most closely corresponds to the taxpayer's total allowed living expenses (Form 433-A, Section 5, total living expenses): multiply the allowed monthly amount by 12 and select the code with the closest value above it (IRM 5.16.1.2.9). A note in the same section illustrates the one exception: if the closest code is only $300.00 more than the annual expense figure, the next higher code would be selected, with the case history documenting that a total positive income increase of only $300 above allowed expenses would not enable the taxpayer to make monthly payments. Any other deviation from the matching code must be explained in the CNC summary, and the IRM also says: “Do not use a higher code simply to prevent re-issuance of the account.” Its example: allowable expenses of $22,000 lead to code 25, and “The account will be reissued systemically when the taxpayer files a return with income of $28,000.00 or more.”

Mandatory follow-up is reserved for cases with an identifiable source of future payment, such as a second mortgage being paid off or retirement funds the taxpayer cannot yet reach. IRM 5.16.1.6 lists what does not justify one, starting with “To update and review a CIS on the chance that a taxpayer's financial condition will change.”

What happens while an account is CNC

IRC 6343(e) is the statutory hook for the levy release: “upon agreement with the taxpayer that the tax is not collectible, the Secretary shall release such levy as soon as practicable.” Before the account goes CNC, IRM 5.16.1.2.9 also says other options “such as Offer in Compromise should be discussed with the taxpayer.”

The collection statute keeps running. CNC is a closing action, not one of the suspension events listed in IRM 5.1.19.3, so an account that stays CNC until its CSED simply expires.

Two automated programs treat CNC differently. The Federal Payment Levy Program drops the account as soon as the hardship closing code posts (IRM 5.11.7.3.2.2 and Exhibit 5.11.7-3), although IRM 5.11.7.3.6 warns that the reversal must post before the Bureau of the Fiscal Service's processing cutoff to save the next payment, and the FPLP coordinator can rescind the levy in the meantime. Private debt collection is different: IRC 6306(d) does not list CNC status among the receivables that cannot be assigned to a contractor, and the IRM's exclusion list (IRM 5.19.1.5.20.3.1) does not mention it either. The protections that usually reach hardship taxpayers are the statutory exclusions for income consisting substantially of SSDI or SSI and for adjusted gross income at or below 200 percent of the poverty level (IRC 6306(d)(3)(E) and (F)); the IRM says an account that later meets an exclusion is returned to the IRS.

Business accounts and other CNC reasons

Hardship is one of several CNC reasons. The common closing codes from IRM 5.16.1.2 include:

Code 13 cases are monitored: IRM 5.16.1.6 says Centralized Case Processing watches in-business CNC accounts for compliance, and new unpaid liabilities can reactivate the old ones.

CNC in a CDP hearing, and CAP

Hardship status is a collection alternative Appeals can grant in a collection due process hearing. IRC 6330(c)(2)(A)(iii) lets the taxpayer raise “offers of collection alternatives, which may include the posting of a bond, the substitution of other assets, an installment agreement, or an offer-in-compromise,” and Treas. Reg. 301.6330-1(e)(3), A-E6, adds that collection alternatives include a proposal to withhold the proposed levy or future collection action. Form 12153 (Rev. 7-2022) carries the request directly: line 8 has a box for “I am currently unable to pay due to financial hardship” and line 9 offers “Currently Unable to Pay” as the proposed alternative, with Form 433-A or 433-B attached. IRM 5.1.9.3.3 reminds Collection that a taxpayer can be placed in CNC hardship even without all returns filed, and IRM 8.22.5.2.6 tells hearing officers the same when a taxpayer wants to withdraw over compliance problems. Appeals may condition an in-person conference on receiving the financial documentation needed to evaluate the hardship claim, with 14 calendar days to supply it (IRM 8.22.5.6.1.2). Vinatieri, above, is the Tax Court's statement of what happens when Appeals ignores a verified hardship.

The Collection Appeals Program is narrower. The actions a taxpayer may appeal under CAP are listed in IRM 5.1.9.4: levies and seizures taken or proposed, NFTL filings, denials of lien certificates and withdrawals, rejected, modified or terminated installment agreements, and denied requests for return of levied property. A refusal to report an account CNC is not on that list, so there is no CAP appeal of the CNC denial as such; the levy that follows the denial is CAP-eligible, and a CDP hearing on that levy (if the notice is still within its window) is where the hardship argument gets independent review. See the Collection Appeals Program.

Requesting CNC

Where the account sits determines the paperwork and the confirmation letter:

1. Build the financial picture first. Complete Form 433-A (or 433-F with ACS), with three months of bank statements, pay records and bills. Compare each expense to the standards.
2. Address every asset. For each asset with equity, explain why selling or borrowing would cause hardship or is not possible.
3. Get compliant where possible. File returns that can be filed; a compliance check is part of every hardship determination.
4. Ask for the levy release. If a wage levy is in place, request release under IRC 6343(e) at the same time; any levy that is creating an economic hardship must be released under IRC 6343(a)(1)(D) and Treas. Reg. 301.6343-1(b)(4), whether or not returns are current.
5. Expect manager approval. “The decision to place an account in CNC status requires the approval of a manager,” with exceptions below a redacted balance (IRM 5.16.1.5).
6. Use TAS if the determination stalls. IRM 5.15.1.2 says a taxpayer who disagrees with an economic hardship determination should be referred to the Taxpayer Advocate Service; see Form 911.

Questions practitioners ask