A taxpayer is eligible for CNC if collection would make the taxpayer unable to meet necessary living expenses, thereby causing undue hardship. The individual taxpayer’s financial information generally must be compiled on a Form 433-A.1 If the taxpayer has assets that can easily be liquidated to pay the liability, the IRS may deny the request for CNC status. Such assets can include whole life insurance policies, retirement accounts, extra vehicles, boats, or campers.
To be “necessary” expenses must be “necessary to provide for a taxpayer’s and his or her family’s health and welfare or production of income.”2 The IRS uses various standards to determine the allowable amount of these expenses. Expenses for clothing, food, housekeeping, personal care, and out-of-pocket health care automatically use the national standard. A taxpayer who claims more than the amount set in the national standard must substantiate and justify each separate expense of the total national standard.3 For housing and transportation, taxpayers are allowed the lesser of the local standard or the amount actually paid.4 The current national and local standards can be found on the IRS website and in I.R.M. 5.15.1.2. “Other expenses” may be considered if they meet the necessary-expense test.5 Examples of “other expenses” found necessary by the IRS include taxes, secured debt, and court-ordered payments.6
It is generally a good practice tip to ask your client to give you at least 3 months of complete bank statements to support your request for CNC status. These statements can usually be accessed online. Modern electronic banking has resulted in most income being deposited into, and expenses directly paid from, bank accounts. These statements can give you a clear picture of your client’s current financial situation. If there are any unexplained deposits or withdrawals, you should consult with your client about these items. You may find that a low-income client is sharing an account with children or other family members or is receiving one-time gifts to pay bills.