CNC or OIC? How to document a taxpayer's financial hardship

When a client's financial reality is bleak, tax professionals often jump to the offer in compromise (OIC) as the solution. However, for many struggling taxpayers, a better fit may be currently not collectible (CNC) status. The key to selecting the right path is understanding how the IRS defines hardship, and how to prove it with airtight documentation.

What do CNC and OIC have in common?

Both collection alternatives are based on the taxpayer's reasonable collection potential (RCP), the IRS's estimate of what it can collect through enforced means. RCP is determined by:

• Disposable monthly income after IRS-allowable expenses
• Net equity in assets (home, vehicles, retirement, cryptocurrency, business property)
• Future earning potential over 12-24 months

Whether pursuing CNC or OIC, you must complete a financial disclosure using Form 433-A (individuals) or Form 433-B (businesses). Include income, expenses, debts and assets documentation, including pay stubs, leases, bank statements, vehicle notes and insurance.

The IRS compares what the taxpayer owns and earns against national and local expense standards. You'll need to justify the expense if a client exceeds those thresholds (say, a high car lease or luxury daycare).

When to recommend CNC

CNC means the taxpayer cannot make any payment without sacrificing basic needs. When the IRS accepts CNC status:

• All collection activity stops.
• No monthly payments are required.
• Interest and penalties continue to accrue.
• The IRS may revisit the case annually to reassess the ability to pay.

CNC doesn't eliminate the debt; it just pauses enforcement. Importantly, the Collection Statute Expiration Date (CSED) continues to run.

Use CNC when:

• The taxpayer has zero disposable income.
• Assets are minimal or not liquid.
• The hardship is real but may improve with time (illness recovery, job transition).
• The taxpayer is nearing CSED, and you want to avoid triggering levy action.

When to consider an OIC

OIC allows taxpayers to settle their debt for less than the full amount if they can prove that full collection is unlikely. The process is more demanding than CNC:

• The taxpayer must be current on all filings and estimated payments.
• Application includes Form 433-A (OIC) or 433-B (OIC).
• Must submit a $205 application fee and initial payment unless a low-income waiver applies.
• IRS expects the offer to equal or exceed RCP.

For example, if a taxpayer has $2,000 in disposable income and $10,000 in equity, their offer must be at least: (2,000 × 12) + 10,000 = $34,000.

If your client offers $1,000, the offer will be rejected, not negotiated.

Use OIC when:

• The taxpayer's future income is low or uncertain.
• The client has no access to liquid assets.
• Full payment is not possible, even over time.
• CNC would delay the inevitable, not resolve it.

Documentation pitfalls to avoid

Whether submitting CNC or OIC, here are some common errors that cause denials or delays:

• Submitting incomplete 433 forms (missing assets, incorrect expense totals)
• Claiming household expenses that exceed IRS standards without justification
• Ignoring assets like cash value life insurance, crypto or shared property
• Not providing a written explanation for non-filer spouses or shared households

Omissions can trigger rejection or return, especially in an OIC case, where credibility is key.

Case study: Know when to pause vs. settle

Leon is a 58-year-old rideshare driver who owes $62,000 in back taxes. He rents, owns a 12-year-old car and has no retirement savings. His net income averages $2,300/month, but expenses (housing, utilities, insurance, fuel) eat up most of it.

You run a mock 433-A and find less than $50 in disposable income. Rather than push an OIC that would likely be rejected or return a small settlement offer that Leon can't afford, you submit for CNC.  The IRS places Leon in CNC status, which suspends enforced collection while the debt remains. 

You agree to recheck his situation in 18 months, or sooner if his income improves.

A real tool, not just a form

Form 433 is more than a filing requirement; it's a decision tool. Use it to:

• Determine which program your client qualifies for.
• Estimate their collection potential.
• Plan for future shifts in income, assets or expenses.

Remember, Form 433-A (OIC) differs from the standard 433-A; be sure you're using the correct version.

Give clients realistic hope

Helping a struggling taxpayer doesn't mean overpromising relief. It means documenting hardship accurately, selecting the correct resolution path and preparing for the next steps. CNC can buy time. OIC can resolve the debt only with honest numbers and complete disclosures.