CNC, Installment Agreement or Offer in Compromise: Choosing the Right Fit

When someone cannot pay the IRS, there are three main administrative paths: Currently Not Collectible status, an installment agreement (including a partial pay agreement), and an offer in compromise. Each solves a different problem. Picking the wrong one wastes time and sometimes money.

The IRS has to talk about the alternatives

IRM 5.16.1.2.9 says that "before reporting an account CNC, other collection options such as Offer in Compromise should be discussed with the taxpayer." And under IRM 5.16.1.5, a manager reviewing a CNC recommendation can send it back with instructions such as "partial collection from available assets, consideration of an installment agreement or an offer in compromise."

The Financial Analysis Handbook lists the possible outcomes of a financial analysis in IRM 5.15.1.2: request payment from available assets, make a lien determination, initiate enforcement if assets are available and the taxpayer will not use them, enter into an installment agreement, report the account Currently Not Collectible, or explain the offer in compromise provisions.

The same financial statement drives all of them. What changes is what the numbers show.

Currently Not Collectible

Fits when: allowable expenses meet or exceed income and there is no meaningful equity, or collecting the equity would itself cause hardship.

What you get: enforced collection stops on the included periods. Wage levies must be released. The collection statute keeps running. Hardship CNC debts are excluded from passport certification under IRS policy.

What you give up: interest and penalties continue. Refunds can be offset. A lien is generally filed if you owe $10,000 or more. The account can be reactivated if income rises above your closing code value.

Best for: temporary hardship you expect to end, or permanent hardship where the collection statute is near enough that the debt may expire.

Installment agreements and partial pay agreements

Fits when: you can make a monthly payment, even a small one.

A full pay installment agreement pays the balance over time. A partial payment installment agreement pays what you can afford each month, which may not pay the balance before the collection statute expires. The IRM covers partial pay agreements in IRM 5.14.2.

What you get: under IRC 6651(h), individuals who filed on time get a reduced failure-to-pay penalty rate of 0.25 percent per month during months an installment agreement under IRC 6159 is in effect. An installment agreement paid on time also excludes the debt from passport certification under IRC 7345(b)(2)(A).

What you give up: a monthly payment. If you cannot really afford it, the agreement will default, and you will be back where you started with less credibility.

There is a middle ground for borderline cases. IRM 5.19.17.2.4 says that when a taxpayer who meets hardship criteria asks for an installment agreement instead of CNC, the IRS can "establish the Installment Agreement (IA) or Partial Pay Installment Agreement (PPIA) with a back-up 53." Form 53 is the CNC report. The IRS prepares for the possibility that the agreement fails. IRM 5.15.1.11 also calls for a backup Form 53 when net disposable income is less than $25.

Offer in compromise

Fits when: you cannot pay the full balance before the collection statute expires, and you can raise an amount the IRS will accept based on your reasonable collection potential.

What you get: an accepted offer ends the debt permanently for the periods included. It also excludes the debt from passport certification under IRC 7345(b)(2)(A).

What you give up: an offer requires Form 433-A (OIC), because IRM 5.15.1.2 says Form 433-F "cannot be used for Offer-in-Compromise cases." The collection statute is suspended while the offer is pending; the campus CNC manual notes that IRC 6331(k)(1) "provides the authority to suspend the CSED while an Offer in Compromise is considered." An offer that fails costs time on the statute clock.

Best for: taxpayers whose situation is unlikely to improve, with a long time left on the statute, and access to funds to pay an acceptable amount.

Comparing them side by side

How I think about the choice

I start with three questions. How long is left on each collection statute? Is the hardship temporary or permanent? Is there any money available, from any source, to fund a payment or an offer?

• Permanent hardship, short statute: CNC is often the most sensible outcome.
• Permanent hardship, long statute, some funds available: an offer may end the problem for good.
• Temporary hardship: CNC to stabilize, then an installment agreement or offer when things improve.
• Some monthly ability to pay: an installment or partial pay agreement, possibly with a backup CNC report in the file.

There are other tools outside these three, including bankruptcy for certain older income tax debts and penalty abatement to reduce the balance. Those deserve their own analysis.

Three short examples

The retiree. A 72-year-old in Pasco County lives on Social Security and a small pension. Allowable expenses exceed income. Her only significant asset is a modest home with some equity, and borrowing against it would leave her unable to cover basic expenses. Her oldest tax year expires in two years. CNC is the natural fit: no payment she cannot afford, and a statute that keeps running.

The laid-off engineer. A 45-year-old lost his job six months ago and is interviewing. Right now he has no income beyond unemployment. He expects to be working within a year. CNC can hold collection while he is out of work, with the understanding that the account will likely come back when his income returns. At that point, an installment agreement may be the right next step.

The disabled contractor. A 58-year-old self-employed contractor suffered a permanent injury and now lives on disability benefits. He owes a large balance with eight years left on the statute. A family member is willing to lend him a modest sum. An offer in compromise may end the debt permanently, instead of leaving it to grow in CNC for eight years.

Same IRS. Same financial standards. Three different right answers.

What not to do

Do not agree to a payment you cannot make just to end a phone call. A defaulted agreement leaves you with the same balance, a collection file that now shows a broken promise, and possibly a new levy notice. Do not submit an offer without first checking what it does to your collection statute. And do not sit in CNC for years without checking whether something better has become possible, such as an offer funded by a change in circumstances.

Do the math before you call

All three paths rest on the same financial analysis under IRM 5.15.1. Run your own numbers against the Collection Financial Standards, check your collection statute dates, and you will usually know which path fits before the IRS tells you.

There is no single right answer to "I can't pay." There is a right answer for your numbers. Find it first.