Falling behind on payroll tax payments can put your business at serious risk. The IRS treats payroll taxes differently from other tax obligations because they include amounts withheld from employees’ wages for income tax, Social Security, and Medicare. These are trust fund taxes, and the IRS considers employers to be stewards of these funds. When unpaid, the agency takes swift action to recover the debt.
For business owners experiencing financial hardship, there is a possible form of relief: Currently Not Collectible (CNC) status. CNC status temporarily suspends IRS collection efforts if granted, recognizing that the business cannot pay its tax debt without compromising essential operations or living expenses.
This guide explains how to get payroll tax debt placed in CNC status, from understanding IRS enforcement to submitting the right documentation. You’ll learn what triggers IRS action, how to qualify for CNC status, and what happens after it’s granted.
Payroll tax debt occurs when a business fails to deposit employment taxes withheld from employee wages. These include income tax, Social Security, and Medicare taxes, which are reported quarterly using Form 941. Employers must also pay a matching portion of Social Security and Medicare taxes, making total liabilities significant.
The IRS considers these withheld funds to be taxes held in trust, meaning they are held on behalf of the federal government. Failing to deposit them on time is a serious violation, even if caused by cash flow problems.
Unpaid payroll taxes are not just a business oversight—they represent employee funds the employer misuses. Because of this, the IRS treats payroll tax debt as one of the most urgent forms of tax delinquency. Delinquent accounts may trigger immediate collection actions, including liens, levies, or seizures. Payroll tax debt often signals broader financial instability, so the IRS moves swiftly to protect at-risk revenue.
When payroll taxes go unpaid, the IRS may assess the Trust Fund Recovery Penalty (TFRP). This penalty transfers liability from the business to individuals deemed “responsible persons.”
A responsible person includes any individual with authority over financial decisions—owners, officers, or employees who decide which bills get paid. The IRS must also prove that the person willfully failed to pay the taxes. Willfulness doesn’t mean intent to defraud—it simply means the individual knew the taxes weren’t paid and allowed other expenses to be prioritized.
The TFRP equals the entire amount of unpaid trust fund taxes, excluding penalties and interest. Once assessed, the IRS can collect from the responsible person’s assets. This includes garnishing wages, freezing bank accounts, or filing federal tax liens.
Understanding payroll tax debt is essential before requesting the Currently Not Collectible (CNC) status. Because trust fund taxes are so strictly enforced, business owners need to know where they stand legally—and what’s at risk—before they pursue relief options with the IRS.
Currently, the Not Collectible (CNC) status is a temporary relief option offered by the IRS when a taxpayer—an individual or business—is unable to pay their tax debt without causing financial hardship. If approved, CNC status pauses all active collection actions, including levies, garnishments, and asset seizures.
CNC status can be critical for businesses that are behind on payroll tax debt. It prevents immediate IRS enforcement, giving the business time to recover without the added pressure of frozen bank accounts or aggressive collection efforts. However, the CNC status does not erase the debt. Penalties and interest continue to accumulate while the account is in this suspended state. This relief is especially useful for struggling employers who want to stay in business while resolving their tax liabilities.
CNC authority is grounded in Policy Statement 5-71 and supported by IRC Section 6343, which allows the IRS to stop collection when it would create economic hardship. According to Treasury Regulation 301.6343-1(b)(4), hardship exists when paying the tax would prevent the business from meeting essential operational expenses.
The IRS uses closing codes to classify CNC cases based on reason and entity type—such as hardship, business closure, or inability to contact the taxpayer.
Businesses, including those with unpaid trust fund taxes, may qualify for CNC if they can prove they lack the income or assets to make payments. To qualify, taxpayers must submit detailed financial information showing that paying the debt would jeopardize operations.
While CNC status offers short-term protection, it’s not permanent. The IRS will periodically reevaluate the financial status and may resume collection if the business can pay.
Both individuals and businesses, including corporations, sole proprietors, partnerships, and limited liability companies (LLCs), may qualify for Currently Not Collectible (CNC) status. The key requirement is that paying the tax debt would cause financial hardship, making it impossible to meet basic living expenses (for individuals) or essential operating costs (for businesses).
In payroll tax cases, the IRS evaluates whether the business entity cannot pay or if a responsible person liable under the Trust Fund Recovery Penalty (TFRP) has financial limitations. In either case, qualifying for CNC status requires detailed proof of economic distress.
The IRS reviews the taxpayer’s monthly income, necessary expenses, and available assets to determine hardship. For individuals, the IRS uses national and local standards to evaluate living costs like housing, utilities, food, and transportation.
For businesses, allowable expenses typically include:
The taxpayer is responsible for covering the essential costs of vendors. If the IRS finds that paying the tax debt would prevent the taxpayer from covering these basic obligations, the account may qualify for CNC status.
Taxpayers must file all required tax returns (like Form 941 for payroll taxes) even if they can't pay. Failure to file can disqualify the taxpayer from consideration.
In addition to meeting income and expense thresholds, the IRS expects full financial disclosure, including documentation of assets, liabilities, and any recent financial activity. Meeting the eligibility criteria does not guarantee approval, but it forms the basis for the IRS to evaluate whether the taxpayer’s account should be reported as not currently collectible.
Applying for Currently Not Collectible (CNC) status involves submitting detailed financial information and confirming that all required tax returns have been filed. The IRS will not consider your request if your business has unfiled returns, including Form 941 for employment taxes or Form 940 for federal unemployment taxes.
The first step is determining which Collection Information Statement (CIS) form you must complete. The correct form depends on your business structure:
These forms document the taxpayer’s financial status and are the foundation of the IRS's hardship determination.
Each form must be accompanied by financial records that verify the information submitted. Businesses should expect to provide:
All information must be accurate and current within the last 12 months. The IRS uses this data to determine your monthly income, expenses, and available assets.
The IRS requires filing all required tax returns before reviewing a CNC request. For businesses, this usually means:
Failure to comply with filing requirements will delay or prevent CNC consideration.
Once the correct CIS form and supporting documents are compiled, you can submit the CNC request directly to the revenue officer assigned to your case or the Automated Collection System (ACS) if no officer is assigned.
The IRS will review the financial information, verify the documentation, and determine whether your business qualifies. Collections will be suspended if approved, but the IRS may file a federal tax lien to protect its interest in your assets.
While CNC status provides relief, the process requires transparency and organization. Incomplete, outdated, or inconsistent information may lead to rejection or delays.
Working with a tax professional or attorney is strongly recommended, especially for payroll tax cases, where personal liability may also be an issue. These professionals can help ensure that your application meets all procedural and documentation standards required by the IRS.
IRS Investigation and Approval Process
The IRS investigates whether to suspend collection after a taxpayer submits a request for the Currently Not Collectible (CNC) status. The scope of the investigation depends on the amount of unpaid tax debt and the taxpayer’s financial profile.
For cases with smaller balances, the IRS conducts a limited review. This typically includes:
For larger debts, the IRS expands the investigation to include:
These steps help the IRS determine whether the taxpayer cannot truly pay or is withholding financial information.
Once the investigation is complete, the revenue officer submits a CNC recommendation. This requires approval from a group manager, who reviews the case for completeness and accuracy.
Each CNC case is assigned a closing code, such as:
The manager guarantees the case satisfies IRS standards and incorporates all necessary documents. Upon approval, the IRS updates the tax account to reflect CNC status and suspends active collection efforts. However, the case remains subject to future monitoring and review.
Payroll tax debt is treated differently from other tax liabilities because it involves trust fund taxes—amounts withheld from employee wages. When a business fails to pay trust fund taxes, the IRS may hold individuals personally liable under the Trust Fund Recovery Penalty (TFRP).
The IRS investigates whether any responsible person, such as an owner, officer, or payroll manager, should face the TFRP before granting Currently Not Collectible (CNC) status. A responsible person has authority over financial decisions.
The IRS must determine the following:
This step is crucial in payroll tax cases because the IRS does not want liability to go uncollected if a responsible party can pay.
CNC classification codes differ based on the business’s operational status:
These codes guide follow-up requirements and determine whether annual monitoring is needed.
Even when the CNC status is approved, the IRS may file a federal tax lien if the unpaid balance is $10,000 or more. A lien protects the government’s interest in current or future business assets. While it may affect credit or financing, the lien ensures the IRS can recover funds if the business’s financial condition improves later.
When the IRS approves the Currently Not Collectible (CNC) status, it suspends active collection actions such as levies and garnishments. However, the tax debt does not go away. The account remains open, and interest and penalties continue to accrue.
CNC status is not permanent. The IRS monitors each case for signs of financial improvement. The IRS may flag a case for review if it receives updated information, such as a new bank account, employer, or address.
Certain CNC cases, especially those classified as hardship, unable to locate, or unable to contact, can be automatically reactivated through IRS systems. These cases are tracked using the Integrated Data Retrieval System (IDRS).
Businesses granted CNC status are often subject to annual reviews. The IRS may request updated financial records, including:
Failure to respond may result in the IRS ending CNC status and resuming collection efforts.
To maintain CNC status, a business must:
CNC status will be removed if the IRS finds the business is noncompliant or incapable of payment.
While the CNC status provides relief from collection, it is only temporary. Businesses should use this time to stabilize their financial situation and explore long-term solutions for resolving their tax liabilities.
Placing your tax debt in Currently Not Collectible (CNC) status offers temporary relief but doesn't completely eliminate it. The IRS will suspend collection actions, but several ongoing obligations and risks remain.
While in CNC status, interest and penalties continue to accrue on your unpaid balance. The IRS does not forgive or waive these charges. Over time, the total amount owed can grow substantially, even though the IRS is not actively collecting.
The IRS will apply any future federal tax refunds to your existing debt. In some cases, state refunds may also be intercepted. Taxpayers should not expect to receive refunds while in CNC status.
The IRS has ten years from the assessment date to collect a tax debt. This period, known as the collection statute expiration date (CSED), continues to run while CNC status is active. However, the clock may pause if you:
These actions can temporarily stop the statute from running.
To maintain CNC status, your business must:
Noncompliance may result in removal from CNC status and resumption of IRS collection efforts.
Securing Currently Not Collectible (CNC) status requires more than showing financial hardship. Business owners must understand the IRS process, provide thorough documentation, and avoid common mistakes that lead to delays or denials.
We highly recommend seeking professional guidance if your business has payroll tax debt. Payroll taxes involve trust fund portions, and failure to pay can trigger the Trust Fund Recovery Penalty (TFRP)—a serious risk for business owners, officers, and financial decision-makers.
A qualified tax attorney or enrolled agent can:
Professional help is especially valuable if your debt exceeds $25,000, a revenue officer is assigned, or you’ve received a levy notice.
The IRS will not approve CNC status based on vague or unsupported claims. To avoid problems:
Missing or inaccurate documentation is one of the most common reasons for delayed or denied requests.
CNC status is temporary and may not be your best long-term option. Alternatives include:
A tax professional can help determine which relief option aligns best with your financial goals and IRS standing.
CNC status, granted by the Internal Revenue Service, temporarily stops enforced collection actions due to hardship. While the IRS suspends levies and garnishments, the debt remains active and accrues penalties. This status gives taxpayers time to stabilize their financial condition. However, the IRS may resume the collection process or file a federal tax lien under certain circumstances.
Yes, businesses can request CNC status on payroll tax debt, but the IRS CNC status process includes review of financials and possible Trust Fund Recovery Penalty assessments. If employee Social Security, additional Medicare tax, or collected excise taxes are unpaid, the IRS will also investigate whether a person responsible can be held liable. Filing and documentation must be current.
Once CNC is approved, the IRS suspends most actions, including levies and seizures. However, the IRS may still file a lien or offset tax refunds. They may also resume other collection actions if your financial situation improves. Staying compliant and responding to all notices the IRS sends during the CNC monitoring period is essential.
Yes, a federal tax lien may still be filed even after the IRS suspends active collections. This protects the IRS’s legal interest in your assets. It may also impact financing or credit access. The IRS takes this step when the unpaid balance exceeds $10,000 and may pursue other collection actions if circumstances change.
CNC status remains effective until your financial condition improves or the IRS identifies additional information. If the IRS discovers an increase in income or unfiled returns, it periodically reviews cases and resumes the collection process. Under certain circumstances, the CNC status may continue until the collection statute expires. Ongoing compliance is essential for maintaining protection.
You may request CNC status independently using the correct Collection Information Statement. However, payroll tax cases often involve excise taxes, additional Medicare tax, or a person responsible under TFRP. These issues are complex, and the Internal Revenue Service may require expert responses. Professional help increases accuracy and ensures compliance with IRS guidelines.
The Internal Revenue Service may reactivate your case if income or assets increase. CNC ends, and the IRS sends notices resuming the collection process. A responsible person may be reassessed, and the penalty equal to the trust fund portion may apply. You must consider installment plans or other solutions to resolve your balance.
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