Can You Get CNC Status With Unfiled Tax Returns?

Unfiled returns and unpaid balances often show up together. Someone falls behind on paying, then stops filing because they know they cannot pay, and the problem compounds. When that person finally asks for hardship status, the first question from the IRS is usually about the missing returns.

The general rule: get compliant

IRM 5.16.1.2 says that when reporting an account CNC, the IRS should "Conduct a compliance check" and that "All open filing requirements or Delinquent Return (Del Ret) modules must generally be resolved and closed appropriately when reporting an account CNC." The campus procedures in IRM 5.19.17.2 say the same, with an exception pointing to the hardship section.

The financial analysis procedures for campus employees in IRM 5.19.13.3 add: "Do not input a financial where the taxpayer is not within filing compliance," followed by an exception: "If the taxpayer is experiencing a financial hardship and indicates cannot pay, currently not collectible (CNC) is being considered."

The word "generally" is doing work. The hardship sections carve out important exceptions.

The field hardship rules

IRM 5.16.1.2.9 addresses unfiled returns in hardship cases directly:

• Open delinquent return modules "may be resolved by closing as little or no tax due, or income below filing requirement (P-5-133), if warranted by the facts of the case." Policy Statement 5-133 allows the IRS to close a delinquent return investigation without securing the return in some circumstances.
• If the taxpayer is required to file and refuses, "a referral or summons may be appropriate."
• Then the key caution: "If a hardship determination is verified, a levy cannot be issued or left in place to persuade a taxpayer to file."
• And a note: "Accounts may be reported CNC hardship if a CIS can be verified, even if there are unfiled returns." If the unfiled return is needed to confirm the hardship, the balance due accounts "should be held until the return is secured and the CIS can be verified, but levies cannot be issued to collect the Bal Dues if all other income/asset checks appear to confirm hardship."

Read together, the field rule is this: the IRS can push you to file, but it cannot use a levy as the lever if hardship is verified.

The campus hardship rules

IRM 5.19.17.2.4 follows the same approach for ACS and campus cases. "If it is ever determined that a levy is creating a hardship," the employee follows the levy release procedures, and "If the hardship is verified, the levy must be released. If the taxpayer has unfiled return(s) the CR should inform the taxpayer that they have unfiled returns and provide adequate time for the preparation of the returns."

For combined balance due and delinquent return cases, the IRM gives a table: delinquent returns that meet Policy Statement 5-133 can be closed as little or no tax due; if income is below the filing requirement, the return investigation can be closed as not liable; if a refund is due, it can be closed as refund due. Otherwise, "The taxpayer must be given a reasonable deadline (not to exceed 30 days & 60 days for international) to complete the return(s)."

What the Tax Court said

In Vinatieri v. Commissioner, 133 T.C. 392 (2009), Appeals sustained a levy against a seriously ill taxpayer in hardship solely because she had unfiled returns. The court held that "Neither section 6343 nor the regulations condition a release of a levy that is creating an economic hardship on the taxpayer's compliance with filing and payment requirements," and that proceeding with a levy that would have to be immediately released was an abuse of discretion.

The opinion also acknowledged that the IRS's policy of requiring filing compliance for collection alternatives is generally reasonable where taxpayers have enough income to meet basic living expenses. Vinatieri protects genuine hardship. It does not make filing optional.

Why you should file anyway

Even when the IRM protects you from a levy, unfiled returns hurt a hardship case in practical ways:

• Verification. The IRS may need the return to confirm the income and expenses on your financial statement, and the IRM allows balance due accounts to be held until it is secured.
• Substitute returns. If you do not file, the IRS may prepare a return for you, and that return rarely includes the deductions and credits you would claim.
• Reactivation. Hardship CNC is monitored through filed returns. Not filing does not make you invisible. It makes you a delinquent filer with a CNC account.
• Penalties. The failure-to-file penalty under IRC 6651(a)(1) is ten times the monthly rate of the failure-to-pay penalty, 5 percent versus 0.5 percent per month, each capped at 25 percent.
• Future options. Installment agreements and offers generally require filing compliance. If your situation improves and you want to resolve the debt, you will need those returns.

Low-income and below-threshold filers

Some people with unfiled years did not have a filing requirement at all. If your income was below the threshold for a year, tell the IRS. The campus table allows a delinquent return investigation to be closed as not liable when income is below filing requirements. Wage and income transcripts can help you show what was reported to the IRS for those years.

When the records are gone

Many people with unfiled years have lost records along the way: a move, a divorce, a flood, a business that closed. That is not a reason to stay unfiled. Wage and income transcripts show what employers, banks, and others reported to the IRS. Bank statements can often be requested from the bank for prior years. Reasonable reconstruction, honestly documented, is how most delinquent returns get prepared.

For hardship taxpayers, the returns are often simple: wages or benefits, the standard deduction, and little or no tax due. Those are exactly the cases where Policy Statement 5-133, which allows certain delinquent return investigations to be closed as little or no tax due, may come into play. The IRS is not interested in spending resources to secure a return that will produce no tax. Show it that the missing years fit that description.

Unfiled returns in a CDP hearing

If your case is in a Collection Due Process hearing, Appeals considers collection alternatives. The Vinatieri opinion is a CDP case, and it stands for the proposition that Appeals cannot sustain a levy that section 6343 would require the IRS to release, merely because returns are unfiled. But Appeals can, and generally will, expect returns to be filed before agreeing to an installment agreement or an offer. In a hearing, get the returns filed as quickly as possible while the hardship facts are documented.

A practical sequence

1. If a levy is causing hardship now, ask for release first, citing IRC 6343 and the hardship procedures. Do not let the unfiled returns delay that conversation.
2. Get wage and income transcripts for the missing years.
3. File the missing returns, starting with the most recent, within the deadline the IRS gives you, or ask for more time with a reason.
4. Submit a current financial statement with documentation.
5. Ask that the account be reported CNC once the returns are processed and the financial statement is verified.

The bottom line

The IRS cannot hold a hardship levy over your head to force you to file. But it can, and usually will, hold your CNC request until you do. The fastest path to real relief runs through filing the returns. Do that, and the hardship rules work the way they were written.