Currently Not Collectible (CNC)

Currently Not Collectible, or CNC, is the disposition the IRS gives a balance-due account when it has decided that enforced collection would leave the taxpayer unable to meet reasonable basic living expenses, or that there is otherwise nothing to collect. The IRS records the decision in its own systems and stops active collection, generally releasing any levy on wages, while the liability itself remains on the books. The Taxpayer Advocate Service puts the consequence plainly: "CNC status does not erase the tax debt; it temporarily delays IRS collection." The tax, the interest on it and the failure-to-pay penalty continue to accrue throughout.

The status has a statutory anchor and a regulatory test. Internal Revenue Code section 6343(e) requires the IRS, "upon agreement with the taxpayer that the tax is not collectible," to release a levy on salary or wages "as soon as practicable." The regulation that defines the hardship the IRS is looking for, 26 CFR 301.6343-1(b)(4)(i), says the 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," and adds that "Unique circumstances, however, do not include the maintenance of an affluent or luxurious standard of living." The IRS's collection manual, IRM 5.16.1, applies that standard through a Collection Information Statement: income, allowable expenses, assets and the equity in them. A statement is treated as current if it is less than twelve months old, and in a narrow set of circumstances the manual lets an employee close a small balance as CNC without one, for example where the taxpayer is incarcerated, has a terminal illness, or has no income other than Social Security, welfare or unemployment benefits.

Internally the closure is a transaction code with a closing code attached, and the closing code carries the reason. Hardship accounts use codes 24 through 32, chosen to match the taxpayer's allowed living expenses, which is what makes the later review mechanical: the IRS's systems compare the total positive income on each subsequent return against the level implied by the closing code, and, in the manual's words, that income "is reviewed annually when a taxpayer files an income tax return." Other closing codes cover accounts the IRS cannot collect for reasons other than hardship, such as a taxpayer it cannot locate, a corporation that has stopped operating and holds no assets, or a decedent with no collectible estate. The Taxpayer Advocate Service warns that a transcript reading "currently not collectible – not due to hardship" is a different animal from hardship CNC, and that the taxpayer in that position still needs to resolve the balance.

What continues matters as much as what stops. The IRS's own page lists it: the debt is "not forgiven or cancelled," "Penalties and interest continue to accrue until you pay your balance in full," the IRS "may file a Notice of Federal Tax Lien to protect the government's interest," and "If you are due a federal tax refund, then we will apply it to your unpaid tax debt." The filing of that notice can affect credit and the ability to sell property, so CNC is not a clean pause. The one clock that keeps running in the taxpayer's favor is the collection statute: section 6502 gives the IRS ten years after assessment to collect, and the Taxpayer Advocate Service notes that the IRS "can attempt to collect your taxes up to ten years from the date they were assessed" while cautioning that certain events suspend that period and extend it. Which events do so is a subject of its own.

CNC sits alongside two other ways of dealing with a balance a taxpayer cannot pay at once, and confusing them is common. An installment agreement is a plan: the taxpayer pays in monthly amounts and the IRS agrees not to levy while it is honored. An offer in compromise is a settlement: the IRS accepts less than the full liability and treats the debt as satisfied. CNC is neither. Nothing is paid, nothing is forgiven, and the IRS simply stops pursuing collection while the hardship lasts. Because it produces no payment, the IRS's page on it steers taxpayers who do not qualify toward the other two routes, and the manual requires open filing obligations to be resolved before an account is closed this way.

1. The IRS asks for a financial statement. Before it will delay collection it generally requests a Collection Information Statement, Form 433-F (or Form 433-A for the self-employed and Form 433-B for a business), and may ask for documents verifying income, monthly living expenses, bank accounts and property.

2. Income is measured against allowable expenses. The IRS compares the taxpayer's income with the living expenses it allows under its financial analysis standards. Where there is no income or equity in assets that could be collected without causing hardship, the account qualifies.

3. The account is closed with a hardship code. The IRS records the determination, releases any wage levy, and stops active collection. The taxpayer still receives an annual notice of the balance.

4. The balance keeps growing. Interest accrues daily and the failure-to-pay penalty accrues monthly until its statutory cap.

5. The IRS reviews later returns. If reported income rises enough to suggest the taxpayer can pay, the case is reactivated and collection resumes, usually with a fresh financial statement and a discussion of payment options.

Take an example. Tomas owes $18,400 in tax from a year in which he lost his job. His income is now $3,100 a month and the IRS's allowable living expenses for his household come to $3,250, so there is nothing left to pay with, and the IRS closes his account as CNC hardship. While it sits there the failure-to-pay penalty continues at its base statutory rate of 0.5 percent of the unpaid tax per month, which on $18,400 is $92 a month, until the penalty reaches its 25 percent ceiling of $4,600; the rate doubles for months after a notice of intent to levy, which an account reaching this point has usually had, and the failure to pay penalty page sets out the variants. Interest compounds on top at the rate the IRS sets each quarter. Two years later Tomas is earning $5,200 a month against allowable expenses of $3,400. His next return shows the higher income, the IRS reactivates the case, and with $1,800 a month of room it asks him to set up an installment agreement for the balance, which is now well above the $18,400 he started with.

Pros

• It stops enforced collection, including a wage levy, for a taxpayer who cannot pay basic living expenses and the tax at once.
• Nothing is paid while the status lasts, which an installment agreement cannot offer.
• The ten-year collection period keeps running, so a debt that sits in CNC long enough can expire uncollected.
• There is no application fee and no form to file beyond the financial statement the IRS requests.

Cons

• The debt is not reduced or forgiven, and interest and penalties keep accruing, so the balance is larger when collection resumes.
• Federal tax refunds are applied to the balance for as long as it exists.
• The IRS may still file a Notice of Federal Tax Lien, with the effects on credit and property sales that follow.
• The status is reviewed against later returns, so an improvement in income brings collection back.