The IRS Taxpayer Advocate, Nina Olsen, reported in her recent testimony to the House Ways and Means Committee that the IRS classified nearly $20 billion in tax debt as “currently not collectible” in 2008. This is more than the amount the IRS collected on taxpayer delinquent accounts, including installment agreements and offers in compromise combined.
The IRS, by policy in its Internal Revenue Manual, ceases collection activity against taxpayers whose debt is deemed “currently not collectible.” See Section 5.16 of the IRM regarding uncollectible accounts.
The IRS will categorize a taxpayer as having an inability to pay and stop efforts to collect if it determines that collecting the debt would impose a financial hardship (see my blog post on IRS financial hardship here). IRS debts can also be put in uncollectible status if it cannot locate the taxpayer or if it determines the amount owed is below IRS tolerance levels (i.e., amount owed, age of account).
The IRS Taxpayer Advocate has repeatedly recommended in her Annual Reports to Congress and in testimony that the IRS review its collection model to correct the imbalance between the amount of bad debt it carries and collects.