Part 5. Collecting Process

Chapter 16. Currently Not Collectible

Section 1. Overview

5.16.1  Overview

5.16.1.1 Overview
5.16.1.2 Currently Not Collectible Conditions
5.16.1.3 Special Conditions
5.16.1.4 Requesting CNC Input
5.16.1.5 Managerial Approval
5.16.1.6 Mandatory Follow Up
5.16.1.7 Quality Review of Currently Not Collectible Accounts
Exhibit 5.16.1-1 Report of Currently Not Collectible Taxes — Part 1 (Front)
Exhibit 5.16.1-2 Report of Currently Not Collectible Taxes — Part 1 (Reverse)

5.16.1.1  (12-01-2006)
Overview

1. Policy Statement P-5-15 (formerly P–5–71) provides the authority for reporting accounts currently not collectible. See IRM 5.1.2.1. Accounts can be removed from active inventory after taking the necessary steps in the collection process.

2. Accounts may be reported currently not collectible (CNC) for a variety of reasons. The appropriate closing codes (cc) are in parentheses. The most commonly used closing codes are as follows:

   • inability to locate the taxpayer or assets (03)

   • partial expiration of the assessment prior to issuance (04)

   • complete expiration of the statutory period for collection or suit initiated to reduce tax claim to judgment (05)

   • For International casework, inability to collect a liability from a taxpayer living in a foreign country (06)

   • a corporation or LLC classified as a partnership or association taxable as a corporation liquidated in bankruptcy (07)

   • death of an individual with no collection potential from the decedent estate or no collection potential for estate taxes (08)

   • accounts below tolerance (09)

   • a corporation, certain limited liability partnerships, or an LLC classified as a partnership or association taxable as a corporation which is inactive and defunct with no assets (10)

   • inability to contact a taxpayer although the address is known and there is no means to enforce collection (12)

   • a corporation or LLC classified as a partnership or association taxable as a corporation remains in business and is current but is unable to pay back taxes (13)

   • when suspending collection of BMF balance due accounts when the key individual is deployed to a combat zone; see IRM 5.1.7.9.3.1 for additional information (14)

   • 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 (15)

   • collection of the liability would create an undue hardship for taxpayers by leaving them unable to meet necessary living expenses (24-32)

   Note:

   See IRM 5.16.1.1(15) for a list of the Integrated Collection System (ICS) literals used to close CNC cases.

3. The investigation required to establish a CNC condition varies with the dollar amount and type of case.

   Note:

   Appropriate procedures must be followed when making third party contacts. (See IRM 5.1.17, Third Party Contacts)

4. Liens should be filed when the unpaid balance of assessments equals or exceeds the amount in LEM 5.16.1.1(4). See IRM 5.12.2, Lien Filing Requirements. If a taxpayer subsequently requests a CDP hearing based upon the NFTL filing, the RO must follow the procedures in IRM 5.1.9.3, Collection Due Process, to forward the case to Appeals.

5. A compliance check will be made and the results documented in the case history in circumstances where the taxpayer is contacted. See IRM 5.1.11.2.3. Compliance checks are not required when the taxpayer cannot be contacted.

6. All actions to support the currently not collectible determination must be documented. The last history entry will be a summarizing statement supporting the CNC decision. Any assets owned by the taxpayer must be addressed in the summarizing statement. If a Mandatory Follow-up is requested, include the reason in the summarizing statement. See IRM 5.16.1.6 for information on Mandatory Follow-up.

7. Revenue Officers, Appeals Officers, and Settlement Officers may report accounts as CNC.

8. Tax examiners in CFf and Centralized Case Processing may report as currently not collectible those accounts that meet existing criteria subject to the limitations in LEM 5.16.1.1(8).

9. Bankruptcy specialists may report as currently not collectible those accounts which meet existing criteria for Insolvency.

10. Technical Services-Advisory employees may report accounts CNC when a local probate office indicates that a proof of claim will not generate funds. Transferee issues should be considered.

11. The Inventory Delivery System, at Decision Points 2, 3, and 6, may tolerance accounts pursuant to LEM 5.16.1.1(11).

12. CNC recommendations generally require the review and approval of the immediate manager to ensure the investigation meets established standards of thoroughness and integrity.

13. Quality control is accomplished through mandatory and sample reviews through Embedded Quality (EQ).

14. The following supporting documents, whenever applicable, will be attached to the case file.

    • Collection Information Statements

    • Form 4183, Recommendation of the Trust Fund Recovery Penalty Assessment

    • copies of transferee assessment recommendations

    • copies of suit recommendations to reduce the tax claim to judgment

    • replies to Courtesy Investigations

    • copies of tax returns

    • other documentation to support the CNC determination

      Note:

      If the account is being reported currently not collectible based on a suit recommendation to reduce the tax claim to judgment , forward the entire case file to Technical Services-Advisory for association with the suit file after the group manager approves the CNC.

15. When closing cases as CNC using the Integrated Collection System (ICS) employees will input the following literals. The related closing codes (cc) are in parentheses:

    • A. Defunct/Insolvent Corporation (10)

    • B. Unable to Pay/Hardship (24-32)

    • C. Bankruptcy (07)

    • D. Unable to Locate (03)

    • E. Unable to Contact (12)

    • F. In-Business Corporation (13)

    • G. Tolerance (09)

    • H. Decedent/Decedent Estate (08)

    • I. Statute Expiration (04 or 05)

    • J. Resolution Trust Corporated Related (15)

    • K. Surveyed

    • L. International - No Field Visit (06)

5.16.1.2  (09-19-2005)
Currently Not Collectible Conditions

1. Delinquent accounts may be declared uncollectible utilizing transaction code 530. It is a requirement that transaction code 530 be defined by the appropriate closing code.

5.16.1.2.1  (12-01-2006)
Unable to Locate and Unable to Contact

1. If neither the taxpayer nor assets can be located, use cc 03 to report the account uncollectible.

2. When the taxpayer's ability to pay cannot be determined because they cannot be contacted and income and assets cannot be identified use cc 12, Unable to Contact.

3. For domestic accounts with an aggregate unpaid balance below the amount in LEM 5.16.1.2.1(3) research of the following resources is required:

   • telephone directories

   • postal tracers

   • IRP

   For international accounts, the same sources will be checked whenever available for the country in question.

4. For domestic accounts with an aggregate unpaid balance over the amount in LEM 5.16.1.2.1(4), attempt to develop leads by researching the following additional sources:

   • DMV listings

   • employment commissions

   • real and personal property records

   • local licensing authorities when a taxpayer has a business that requires a license

   • on-line services that help in locating taxpayers, such as Accurint

   • RTVUE if the due date of the last filed return was within the past two years. Use RTVUE to determine if a copy of the return should be secured to further develop leads to locate the taxpayer, assets or levy sources.

   For international accounts, besides using these sources when and where practical, a Tax Attache could be consulted for further potential sources of value for the country in question.

5. The above list is not all inclusive. Local management may require that additional information sources be checked, for example U.S. Coast Guard and local licensing agencies where boat ownership is common.

6. For accounts with an aggregate unpaid balance of assessments greater than the amount in LEM 5.16.1.2.1(6), a field call to the taxpayer's last known address is required. For taxpayers residing outside the United States, Puerto Rico, and the U.S.Virgin Islands, a field call will only be required if treaties permit such contact and if management determines that a field call is a necessary part of the collectibility determination.

   Note:

   W&I ACS call sites are exempt from the requirement to make field calls.

7. For IMF and sole proprietor taxpayers:

   • secure a short credit report when the unpaid balance of assessments meets the criteria in LEM 5.16.1.2.1(7) (not required if secured by ACS or the ADR system within the past six months). This includes cases where recently filed returns will result in liabilities which meet the criteria in LEM 5.16.1.2.1(7).

   • secure a full credit report if the aggregate unpaid balance of assessments exceeds the amounts in LEM 5.16.1.2.1(7) . This includes cases where recently filed returns will result in liabilities in excess of the amounts in LEM 5.16.1.2.1(7).

8. When the aggregate unpaid balance of assessments exceeds the amounts in LEM 5.16.1.2.1(8) check AMDIS to determine if there is a current open examination. If there is an open examination, contact the revenue agent to see if he/she has a new address for the taxpayer or has identified any additional assets.

9. Closing codes 3 and 12 can be used if the taxpayer cannot be re-located or re-contacted after the investigation has begun.

5.16.1.2.2  (09-19-2005)
Statute Expiration

1. Collection statutes are a priority. The actions required to resolve short statute issues will depend on the circumstances.

5.16.1.2.2.1  (09-19-2005)
Imminent Statute Expiration

1. An imminent CSED module is any module with twelve months or less remaining on the collection statute. See IRM 5.1.19.8 for specific procedures used to verify, monitor, work, and document these types of cases.

2. To report collection statutes that expire on an imminent CSED where the revenue officer has taken all appropriate actions without resolving the module(s) prior to the expiration of the statute, use the procedure in IRM 5.1.19.8.4.

3. To report collection statutes that expire on an imminent CSED where the revenue officer has not taken all appropriate actions without resolving the module(s) prior to the expiration of the statute, use the procedure in IRM 5.1.19.8.5.

4. If payments can be applied to a CSED module they should be applied to the oldest CSED liability first. This includes proceeds from seizures, levies, installment agreements and other undesignated voluntary payments. For proceeds from a levy or installment agreement, the CSED module where the payment is applied must be included on the levy or installment agreement.

5. Do not solicit voluntary payments on accounts barred by statute. If a taxpayer makes a payment on an account barred by statute, inform them that payment is not required and ask if he/she still wishes to make the payment or have it returned. The taxpayer must be advised that the payment is purely voluntary and will be treated as a gift to the U.S. Treasury. If the taxpayer's intentions cannot be ascertained, return the payment.

6. Proceeds from the sale of assets seized prior to the expiration of the statute can be applied after the date of expiration. The affected modules require that TC 520 cc 80 be input. Any outstanding balance will be closed using TC 530 cc 05 after the application of sale proceeds and after the statute expires. See IRM 5.12 to determine if the NFTL needs to be refiled. The revenue officer should request input of transaction code (TC) 520, closing code 80 to allow for application of the proceeds from the seizure. Once the proceeds are posted, the revenue officer must request input of TC 521, no closing code required.

7. Proceeds that are received as the result of a levy which was served prior to the CSED may be applied to the expired module(s).

   Note:

   In some instances penalties may have a different CSED apart from any other assessment on the module.

5.16.1.2.2.2  (09-19-2005)
Non-Master File Expired Statute

1. For non-master file accounts, if only a portion of the liability expired prior to issuance, report the expired portion on Form 53, cc 04 and annotate 'Statutory Period for Collection Expired'.

2. If the statute expired on a portion of the liability prior to issuance and the balance expires after issuance, use cc 05 for the entire amount. It is not necessary to use cc 04 for a portion of the liability and cc 05 for the balance when the entire balance can be closed using cc 05.

3. Complete all actions such as payment tracers and adjustments prior to input of either cc 04 or 05.

5.16.1.2.2.3  (09-19-2005)
Master File Partial Statute Expiration

1. The majority of master file accounts on which the collection statute has expired either on part of the liability or on the entire liability prior to issuance will be identified by TDA issuance code 534.

2. If only a portion of the module has expired, adjust the balance by reporting the expired portion on Form 3870 using transaction code 534.

   Note:

   Do not use cc 04 for master file accounts as this will cause the entire account to go to status 53.

3. If the remaining balance is determined to be uncollectible, use the appropriate closing code such as hardship, unable to contact, etc.

5.16.1.2.2.4  (09-19-2005)
Master File Complete Statute Expiration

1. Use closing code 05 when the entire module balance expires after issuance.

2. Closing code 05 is also used in circumstances where a suit has been initiated to reduce a tax claim to judgment. The filing of a suit will suspend the collection statute during litigation. If the collection statute expires prior to the filing of the suit, report the account CNC cc 05. A report of the circumstances of the statute expiration is not required under these circumstances.

   Note:

   Closing code 05 can only be input after the statute has expired.

3. If a suit is being recommended based on anticipated improvement in the taxpayer's financial condition - such as discharge of a debt, inheritance or other significant property acquisition - report the account CNC based on the taxpayer's current circumstances (e.g. hardship, unable to locate, etc.).

4. The suit must be filed prior to the statute's expiration. The recommendation should be initiated in sufficient time so that it can be forwarded to Area Counsel at least nine months before the expiration of the statute. A copy of the recommendation will be kept with the case file. For further information on suits, see IRM 5.17.4.

5. Guidelines for determining the feasibility of recommending a suit are found in LEM 5.5.

5.16.1.2.2.5  (09-19-2005)
Report of Statute Expiration

1. The employee assigned the case at the time of the statute expiration will be required to report the expiration in accordance with the procedures in IRM 5.1.19.8. This requirement applies to situations where a statute expires on any party to a joint assessment where the balance is collectible from the other party(s). These procedures apply to cases where a module has been reported CNC with closing codes 04 and 05 or in cases where it is permissible to let the collection statute expire in inventory with group manager's prior concurrence.

2. To report an expired collection statute on a case where the revenue officer has taken all appropriate actions without resolving the module(s) prior to the expiration of the statute, use the procedure in IRM 5.1.19.8.4.

3. To report an expired collection statute on a case where the revenue officer has not taken all appropriate actions without resolving the module(s) prior to the expiration of the statute, use the procedure in IRM 5.1.19.8.5.

5.16.1.2.3  (12-01-2006)
Bankrupt Corporations

1. If a corporation has been in bankruptcy and no further proceeds will be received from the bankruptcy and anticipated collection from abandoned or after-acquired property is insufficient to warrant further collection efforts, use cc 07.

2. The trust fund recovery penalty assessment must be considered and results documented prior to reporting the trust fund liabilities CNC using criteria in LEM 5.7.2.

3. If the aggregate assessed balance exceeds the amounts in LEM 5.16.1.2.3(3) request information on the latest filed income tax return (1120 or 990) by using BRTVU to help identify additional assets. If assets are indicated, secure a copy of the return to pursue any leads. Requests for returns should be limited to returns filed within the prior two years.

4. If the aggregate assessed balance exceeds the amounts in LEM 5.16.1.2.3(4) and any portion of the assessment results from an examination and/or fraud penalty, request a copy of the revenue or special agent's report. Review the report for additional assets, inconsistencies in the taxpayer's financial disclosure and potential for transferee assessment.

5. If the aggregate assessed balance (open and CNC) exceeds the amounts in LEM 5.16.1.2.3(5), check AMDIS. If there is an open examination, contact the agent to determine if there are additional assets or to provide information which may limit the scope of the examination based on lack of collectibility.

6. Closing code 07 may also be used for LLC cases, classified as partnerships or as associations taxable as a corporation, that have been through liquidating bankruptcy.

5.16.1.2.4  (09-19-2005)
Decedent and Decedent Estates

1. Use closing code 08 to report an account CNC on a decedent or estate taxes.

2. Closing code 08 is appropriate for IMF joint liabilities only when both taxpayers are deceased.

3. Closing code 08 may be used after determining that there is no collection potential from the surviving spouse. Request a mandatory follow-up for the surviving spouse if appropriate.

4. Do not use cc 08 when only the secondary taxpayer is deceased.

5. Closing code 08 also applies to BMF sole proprietorships and partnerships when all of the partners are deceased and taxes were due at the time of death.

6. In situations where the owner of a disregarded entity limited liability company is deceased, closing code 08 is appropriate.

7. In all decedent and decedent estate cases attempt to secure the following:

   • date of death

   • county/city in which the taxpayer died

   • the taxpayer's place of residence at the time of death

   • the name, address and telephone number of the fiduciary

   Note:

   Closing code 08 does not apply to corporations even though one or more of the officers may be deceased.

8. Additional sources may be used to determine the date of death including:

   • on-line locator services

   • obituaries

   • family members

   • death certificates

9. Field employees will consult with Technical Services-Advisory for the purpose of filing a proof of claim when there is an estate proceeding.

   Note:

   See IRM 5.5 Insolvencies, Decedent Estates, and Estate Taxes and IRM 5.17, Legal Reference Guide for Revenue Officers regarding proof of claim and other administrative actions.

10. Consider a transferee assessment if circumstances warrant and document the ICS history.

11. When reporting accounts CNC using closing code 08, do not request separate input of TC 540 to delete the master file filing requirements. TC 530 cc 08 generates a TC 540.

5.16.1.2.5  (12-01-2006)
Tolerance

1. Accounts with balances below the amount specified in LEM 5.16.1.2.5(1) & (2) may be reported CNC without further action. Use closing code 09.

2. When there are multiple modules where any one module exceeds the tolerance level, do not use closing code 09. Close all modules using the appropriate CNC closing code such as unable to locate, hardship, etc.

5.16.1.2.6  (12-01-2006)
Defunct Corporations

1. Closing code 10, defunct corporation, applies to any corporation that is no longer operating and from which all assets have been dispersed.

2. When a corporation has been dissolved under state receivership proceedings or other state dissolution actions, use closing code 10. See IRM 5.5.2, Working Non-Bankruptcy Insolvency Cases.

3. If the aggregate assessed balance exceeds the amounts in LEM 5.16.1.2.6(3), request information on the latest filed income tax return (1120 or 990) by using BRTVU to help identify additional assets. If assets are indicated, secure a copy of the return to pursue any leads. Requests for returns should be limited to returns filed within the prior two years.

4. Closing code 10 may also be used for limited partnership cases when the partnership agreement limits the liability of the partners under local law and the trust fund recovery penalty consideration is documented.

5. The trust fund recovery penalty consideration must be documented before reporting the trust fund taxes CNC when the liability meets the criteria in LEM 5.7.2. This consideration will also include the potential for additional TFRP liabilities from any unfiled returns.

6. If the aggregate assessed balance exceeds the amounts in LEM 5.16.1.2.6(6) and any portion of the assessment results from an examination and/or fraud penalty, request a copy of the revenue agent's report. Review the report for additional assets, inconsistencies in the taxpayer's financial disclosure and potential for transferee assessment.

7. If the aggregate assessed balance (open and CNC) exceeds the amounts in LEM 5.16.1.2.6(7) check AMDIS. If there is an open examination, contact the agent for evidence of assets.

   Note:

   If the corporation is chartered in a state that permits corporate reactivation and it appears likely that the corporation will resume business, consider a mandatory follow-up.

8. Closing code 10 may also be used for LLC cases classified as partnerships or as associations taxable as a corporation, when the business is no longer operating, all assets have been dispersed, and the trust fund recovery penalty consideration is documented.

9. Seek Counsel's input in cases of state receivership. Revenue officers should consider consulting with Technical Services-Advisory prior to contacting Counsel. See IRM 5.17.13.1 for further information in circumstances involving assignments for the benefit of creditors, corporate dissolutions, etc.

5.16.1.2.7  (12-01-2006)
In-Business Corporations

1. Accounts may be reported CNC using cc 13 when an operating corporation cannot pay its back taxes and enforcement cannot be taken because the corporation has no distrainable accounts receivable or other receipts or equity in assets.

2. Closing code 13 may also be used for LLC cases classified as partnerships or as associations taxable as a corporation, when an operating business cannot pay its back taxes and enforcement cannot be taken because the LLC has no distrainable income or equity in assets.

3. A trust fund recovery penalty investigation must be completed and a recommendation must be approved prior to disposition of the account. See IRM 5.7.4, Investigation and Recommendation of TFRP, and LEM 5.7.2 for further information.

4. Consider issuance of Letter 903(DO) to prevent accrual of additional liabilities and document the decision. If L903 is not issued, input TC 148-0 or TC 148-1.

   Note:

   If L903 is issued, request input of TC 148 .

5. There is no systemic follow-up on this closing code. Initiate a mandatory follow-up 18 to 24 months after the date of the Form 53. The mandatory follow-up will include securing a new collection information statement, conducting a full compliance check, and reviewing the corporation's latest income tax return. This review will determine whether the account will be reactivated or scheduled for additional mandatory follow-up.

6. All subsequent accounts on the taxpayer must be investigated to verify the taxpayer's financial condition and a trust fund recovery penalty recommendation made on applicable taxes. See IRM 5.7.4, Investigation and Recommendation of TFRP.

5.16.1.2.8  (09-19-2005)
Insolvent Financial Institutions

1. Income tax liabilities of institutions formerly under control of the Resolution Trust Corporation (RTC) are subject to interagency agreement between IRS and RTC. The Federal Deposit Insurance Corporation (FDIC) is the successor to this agreement. Upon receipt of a copy of the FDIC Certification of Treasury Funds Usage, annotate the case history, request TC 530, cc 15, and submit for managerial approval. Consult with SB/SE Area Counsel on statute expiration issues to determine whether or not a collection suit should be initiated and/or is required and document the case history. Revenue officers should consider consulting with Technical Services-Advisory prior to contacting Counsel.

2. This procedure applies only to corporate income tax liabilities. Liabilities other than corporate income tax must be resolved by Insolvency.

5.16.1.2.9  (12-01-2006)
Hardship

1. Follow the procedures in IRM 5.15 to determine the correct resolution of the case based on the taxpayer's assets and equity, income and expenses. Appropriate case resolutions include either immediate full payment, installment agreement, offer in compromise or hardship CNC using closing codes 24-32.

2. Verification of a CIS is not required if the aggregate unpaid balance is less than the amount in LEM 5.16.1.2.9(2) and the information on the CIS appears reasonable.

3. Under certain conditions, a CIS is not required before reporting an account CNC. The aggregate assessed balance, including any prior CNC's, must be less than the amount in LEM 5.16.1.2.9(3) 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

   Note:

   (1) These accounts do not require management approval if they are assigned to ACS. All other functions require managerial approval.

   Note:

   (2) Employees should confirm the taxpayers' circumstances to the extent possible prior to declaring the account uncollectible.

4. For accounts between the amounts in LEM 5.16.1.2.9(4) the following verification is required:

   • CFOL

   • IRP

   • RTVUE

   Note:

   RTVUE is required only if the last filed return was for one of the immediate two preceding years. If RTVUE reveals new income or asset information secure a copy of the return(s) for the purpose of identifying income or assets.

5. For accounts above the amounts in LEM 5.16.1.2.9(5) the following additional verification is required:

   • full credit report on IMF and sole proprietor taxpayers

   • real property records

   • personal property

   • AMDIS. If there is open Examination activity, contact the revenue agent to determine any additional sources of collection or the need to limit the scope of the examination based upon collectibility.

   • RAR or SAR if the assessment originated in Examination or CI

   Note:

   If the assessment originated in Examination or CI, attempt to contact the revenue agent or special agent. Request a copy of either the SAR or RAR if the discussion with the revenue agent or special agent indicates additional income or assets.

   Note:

   If unable to obtain any information from the special agent, consider consulting with Technical Services-Advisory. If there is a TC 910 on the module the taxpayer may have filed a financial statement with the probation office.

   Note:

   Credit reports are optional for accounts with an aggregate balance below the amounts in LEM 5.16.1.2.9(5) . If a credit report is secured it should be a full credit report and not a short credit report.

6. IMF and BMF accounts against sole proprietorships and partnerships that cannot be collected due to bankruptcy will be closed using hardship closing codes.

7. IRC §6343(e) requires the immediate release of a levy on salary or wages due a taxpayer upon agreement with the taxpayer that the tax is not collectible. See IRM 5.11.2, Serving Levies, Releasing Levies and Returning Property. Case histories must be reviewed to ensure that wage levies are released prior to declaring an account uncollectible under hardship closing codes. The case history must be documented.

   Note:

   If transaction code 670 with designated payment code 05 (levy) is present on any module or a regular series of payments is noted, ensure that the disposition of the levy is known.

8. A compliance check will be made and the results documented in the case history for all hardship determinations per IRM 5.16.1.1(5). Any open filing requirements or Taxpayer Delinquency Investigation (TDI) modules must be resolved and closed appropriately when reporting an account currently not collectible under hardship provisions.

9. Use the hardship closing code that most closely corresponds to the taxpayer's allowable expenses. See Form 433A, Collection Information Statement for Wage Earners and Self-Employed Individuals; Section 9, Monthly Income and Expense Analysis; Line 45, Total Living Expenses. If the closing code chosen does not correspond to the taxpayer's allowable expenses, document the reason for the deviation in the summarizing statement for the CNC decision. Generally, do not select a code below the taxpayer's allowable expenses. Do not use a higher code simply to prevent re-issuance of the account.

   Note:

   See IRM 13.1.7.2 for Taxpayer Advocate Service criteria for hardship situations.

5.16.1.2.10  (12-01-2006)
International

1. Collection investigation and distraint actions by the Service in cases involving taxpayers residing in foreign countries are not treated the same as those involving taxpayers residing in the United States. In instances where a taxpayer residing outside the United States, could pay the liability but due to the inability to collect in foreign countries, the Service cannot take further action, closing code 06 will be used. However, collection from U.S. taxpayers in five foreign countries may be possible only under the special procedures of the collection assistance provisions of U.S. treaties with Canada, Denmark, France, Netherlands, and Sweden. Taxpayers residing in U.S. possessions and territories (a.k.a. insular areas) are treated the same as those residing in the United States.

5.16.1.3  (09-19-2005)
Special Conditions

1. In certain circumstances employees will be required to take additional actions to ensure that CNC accounts are properly closed.

5.16.1.3.1  (09-19-2005)
Transferee Cases

1. If a transferee assessment has been recommended and the liability is not collectible from other sources, report the transferor account CNC under the appropriate closing code.

2. Document the consideration of transferee liability prior to case disposition.

5.16.1.3.2  (12-01-2006)
Assessments Against Two or More Taxpayers

1. Assessments against more than one taxpayer are reported CNC only if the tax cannot be collected from any of the taxpayers.

2. An accepted offer in compromise will release the taxpayer who made the offer from the entire liability if the taxpayer complies with all the terms of the offer. Offer credits are applied to the original liability reducing the overall debt. The amount to be reported CNC for the remaining taxpayer(s) is the balance of assessments after credits.

   Note:

   For specific procedures concerning partnership liabilities see IRM 5.8.4.13.4 and 5.15.1.36.1(3).

5.16.1.3.3  (12-01-2006)
Cases Reported Currently Not Collectible Based Upon a Prior Form 53

1. If another delinquent module becomes due and owing after the initial CNC, the new account may be reported CNC without further investigation if the prior CNC determination is no more than twelve months old.

2. Exceptions are:

   • corporate trust fund taxes which require a trust fund recovery penalty determination or which accrued after the date of the prior CNC determination

   • prior bankruptcy (07) dispositions; contact Insolvency to determine other collection sources

   • the taxpayer has a new address and case was reported CNC as unable to locate or unable to contact

   • a lien determination is required per IRM 5.12.2.4

3. Combined Annual Wage Reporting (CAWR) and state FUTA match assessments may be reported CNC without investigation if they meet LEM 5.7.2 criteria and the prior CNC closing code is 10. If the prior closing code is 07, contact Insolvency to determine collection potential.

5.16.1.3.4  (12-01-2006)
Limited Liability Companies

1. Limited liability companies (LLC's) are business entities that are organized and established under state law which specifically limits the liability of the owners for debts of the LLC. The identity of the party liable for taxes is either the LLC or the owner of the LLC.

2. The tax classification of an LLC depends on the number of owners (known as members) of the LLC and on any election filed by the LLC (filed on Form 8832).

3. When an LLC is owned by two or more members, the LLC may only elect to be taxed as a partnership or as a corporation.

4. When an LLC is owned by a single member, it may elect to be treated as a corporation (including treatment under Subchapter S) or as a disregarded entity. In the event a single-member LLC does not file an election, it is treated as a disregarded entity by default and the owner is liable for all federal taxes. The owner of the single-member disregarded LLC can be an individual, a corporation or a partnership. The LLC’s activities are treated in the same manner as a sole proprietorship, branch, or division of the single member.

   Note:

   Since the owner of a single-member disregarded LLC can be another LLC, which can be either taxed as a corporation or partnership or treated as a disregarded entity for tax purposes, employees must be alert to the possibility of multiple layers of ownership.

5. Where the LLC is taxed as a corporation or partnership, consider the following:

   • collectibility is based on the income and assets of the LLC

   • the NFTL is filed in the name of the LLC

   • the assets of the members of the LLC are not subject to collection action

   • the TFRP must be considered with respect to the members or employees of the LLC who meet the definition of responsibility under IRC 6672

6. When the liability is assessed against a single-member disregarded LLC, the statutory lien is against the owner, not the LLC and must be filed in the name of the owner. Do not include the name of the disregarded LLC on the NFTL. See IRM 5.12.2.6.3 for further instructions concerning liens against single-member disregarded LLCs.

7. Because state law specifies that the owner of a single-member disregarded LLC has no direct ownership in LLC assets, the property of the LLC is not available for collection action. Collectibility is determined based on the owner's income and assets.

   • In situations where the owner of a single-member disregarded LLC is an individual, that individual is responsible for the liability.

   • When the owner of the single-member disregarded LLC is a partnership, the partnership is responsible for the liability. Counsel should be consulted to determine if individual partners are also responsible for the liability. Revenue officers should consider consulting with Technical Services-Advisory prior to contacting Counsel.

   • If the owner of the single-member disregarded LLC is a corporation, the corporation is responsible for the debt. Employees of the LLC or owner entity may be responsible for Trust Fund Recovery Penalty (TFRP) under IRC 6672.

8. Pursuant to Notice 99-6, 1999-1 C.B. 321, the single-member disregarded LLC may file employment taxes using either its own EIN or the TIN of the owner. Irrespective of how the tax is assessed, the liability is that of the owner. The name of the owner should be added to the assessment record before declaring the account uncollectible.

   Note:

   Proposed regulations were issued on October 18, 2005 that would shift the liability for employment taxes from the owner to the LLC. The regulations are proposed to be effective on the first January 1st following the date they are published as final regulations. If these regulations are made final, Notice 99-6 will be revoked, and single-member LLCs will be required to file employment tax returns using their own names and EINs. Accordingly, if the regulations are made final, assessments should be made against the LLC.

9. Counsel should be consulted whenever legal issues are encountered. Consider consulting Technical Services-Advisory prior to contacting Counsel.

5.16.1.4  (12-01-2006)
Requesting CNC Input

1. Various forms, such as 53, 3177 and 4844 may be used to request input of a TC 530. The information required includes the period(s), MFT and the closing code.

2. For ICS cases, the group manager’s approval of the CNC allows the TC 530 and closing code to upload to IDRS. At least one of the modules must be in status 26 on IDRS for the upload to be successful.

   Note:

   ICS will not send a TC 530 to IDRS on pre-assessed modules. ICS cases with a combination of assessed and unassessed (i.e. pre-assessed accounts) must be held until all modules for CNC have been assessed. Once assessed on IDRS the ICS-only Balance Due notice modules can be created for these periods. It is not necessary to wait until all modules are in status 26, if one module is in status 26.

3. For cases not processed on ICS, prepare Form 53 and complete the following actions:

   • annotate Form 53 "Assessed/Unassessed" in red

   • Group assessed and unassessed accounts together in Item 16 of Form 53, beginning with assessed liabilities; write "Unassessed" at the beginning of the unassessed periods header.

   • After input of TC 530 on the assessed liabilities, forward the file to the local support function for monitoring of pre-assessed periods.

4. Completion of items 15 and 21 on Form 53 will depend on the nature of the closure and the procedures needed to close the account. Only certain records need to be checked depending on the dollar level and type of account.

5. Input personnel should ensure that proper approvals have been secured prior to input of a CNC request. Return unapproved requests to the initiator.

5.16.1.5  (09-19-2005)
Managerial Approval

1. Except as noted in IRM 5.16.1.2.9(3), the decision to place an account in CNC status requires the approval of a manager. The approval should normally be that of the recommending employee's immediate manager. Acting managers may be given authority to approve CNC's.

2. The manager's review must address the thoroughness of the investigation to ensure that a hardship condition exists before approving a recommendation to declare an account uncollectible.

3. If additional actions are needed to CNC an account, the manager should indicate what additional steps need to be taken before the CNC can be approved such as partial collection from available assets, consideration of an installment agreement, or an offer in compromise.

5.16.1.6  (12-01-2006)
Mandatory Follow Up

1. Systemic follow-up is limited to hardship, unable to locate, and unable to contact cases. In some circumstances a mandatory follow-up action is requested to ensure protection of the revenue potential of the case including specific assets such as vestment in funds or full payment of an encumbrance of real property.

2. Request mandatory follow-up only when required or when there is a likelihood that revenue will be collected by taking the requested action. Request mandatory follow-up rarely on accounts subject to systemic follow-up. This includes IMF accounts and BMF accounts owed by individuals in which the SSN has been input to the BMF.

3. Do not request mandatory follow-up in the following instances:

   • update and review a collection information statement on the chance that a taxpayer's financial condition will change

   • check on future compliance with filing requirements

   • verify that payments are being made on an installment agreement

   • verify that estimated tax payments are being made

   • determine offset of a potential refund

   • attempt to locate a taxpayer whose accounts were reported CNC with closing code 03; or

   • The account balance is less than the Bal Due deferral level in LEM 5.3.2.

   Example:

   Financial information shows the taxpayer's allowable expenses exceed income and no equity in assets. The taxpayer has fallen on hard times but expects to be back to work in a year and able to pay the tax debt. Allowable expenses are $22,000. Report the account CNC using closing code 25. Do not request a mandatory 53 follow-up. The account will be reissued systemically when the taxpayer files a return with income of $28,000 or more.

   Example:

   Financial information shows the taxpayer's allowable expenses exceed income. The taxpayer has equity in their home sufficient to pay the tax debt and requests an eight-month extension to pay to allow them time to refinance their residence. Do not report this account as CNC with a mandatory follow-up in 8 months. Continue to resolve this case using appropriate IRM procedures.

4. Request mandatory follow-up when there is evidence that the taxpayer's ability to pay will improve and either computer generated reactivation is not available or the improvement will happen significantly sooner than systemic reactivation can occur. Generally, the expectation is that revenue will be collected as a result of the follow-up request. Circumstances include:

   • IMF accounts where the taxpayer will pay off a debt which creates positive cash flow for payment of the tax

   • in business corporation cases and other employment tax cases (proprietorship or partnership) where the taxpayer is still in business

   • BMF accounts in which the SSN input to the BMF entity is not used

   • the account is reported CNC using cc 12 (except for IMF and BMF accounts subject to systemic follow-up) and there is definite indication contact should be made in the future

   • the taxpayer is reported CNC as a defunct corporation but there is an indication it will resume operations in the future

   • the taxpayer is a seasonal worker, and the tax would be collectible if the taxpayer is contacted when working

   • non-master file accounts

   • cases in which the 65 cycle suppression of reactivation built into the systemic follow-up program would prevent timely action

   • cases where a notice of levy was issued to attach retirement income and assets which the taxpayer is not yet eligible to receive

   Example:

   Financial information shows the taxpayer's allowable expenses equal income. The taxpayers have equity in their home but already have a second mortgage and cannot qualify for a third. The second mortgage will be paid in 10 months. Allowable expenses are $42,000. Report the account CNC using closing code 27 with a mandatory follow-up in 12 months to secure payment from the taxpayer through either a new second mortgage and/or and installment agreement.

5. Document the specific follow up actions and the date required in item 22 of Form 53 (or equivalent) in sufficient detail to ensure appropriate follow-up. Also document the case history to permit review of the follow-up action after part 4 of Form 53 is detached. As each follow-up action is completed, update part 4 to show the date of the next follow-up.

6. If the account remains in CNC after a follow-up, consider updating the closing code to reflect current conditions. If a new closing code is needed request a TC 530 with the new closing code on the CNC modules. Indicate on the request document that the entity is not on IDRS. Evaluate BMF entities to determine if a TC 130 should be input on an individual or general partner's SSN and request the appropriate input.

7. When a CNC case is closed through ICS with a mandatory follow-up request, after managerial approval, ICS systemically creates a Non-Field OI and assigns it to Centralized Case Processing (CCP). The revenue officer then sends the paper file to CCP Drop Point N-803. CCP will monitor the follow-up action.

8. The support function will maintain a file for mandatory follow-up requests. These files will not be retired to the federal records center.

   • file the cases by month and year of the requested action as determined by the originator

   • file the cases alphabetically if a systemic monitoring program is used

   • generate and control subsequent actions with a Courtesy Investigation

5.16.1.7  (12-01-2006)
Quality Review of Currently Not Collectible Accounts

1. Quality review of CNC accounts is conducted through Embedded Quality (EQ).

2. CNC cases with closing codes other than 39 are included in a weekly random sample of closed Balance Due taxpayer cases. See IRM 5.13.1.8, Area CQMS Sampling Procedures.

3. EQ quality review standards pertaining to CNC and other closures are found in IRM 5.13.

Exhibit 5.16.1-1  (09-19-2005)
Report of Currently Not Collectible Taxes — Part 1 (Front)

Exhibit 5.16.1-2  (12-01-2006)
Report of Currently Not Collectible Taxes — Part 1 (Reverse)