4.20.2 Scope Consideration

Manual Transmittal

October 04, 2017


(1) This transmits revised IRM 4.20.2, Examination Collectibility, Scope Consideration.

Material Changes

(1) Minor editorial changes have been made throughout this IRM. Website addresses, legal references, and IRM references were reviewed and updated as necessary.

(2) Material changes to the IRM as listed in the table below:

IRM Reference Description of Change
IRM Expanded to include the requirements of IRM, Address Management and Internal Controls.
IRM Expanded to include all collectibility considerations and how to apply each. It also provides direction for where to document the case file. Information from IRM, Bankruptcy, and IRM, Non-filers, was included and those subsections deleted.
IRM Clarified to define and give direction for proper documentation for each potential outcome of scope considerations.
IRM Included in IRM
IRM Included in IRM

Effect on Other Documents

This revision supersedes IRM 4.20.2, dated March 01, 2013.


SB/SE Field and Specialty Examiners, excluding Estate and Gift Tax

Effective Date


Michael W. Damasiewicz
Director, Examination - Field and Campus Policy
Small Business/Self Employed

Program Scope and Objectives

  1. Purpose. This IRM section provides guidance for the consideration of collectibility as a factor in determining the scope and depth of an examination.

  2. Audience. These procedures apply to all SB/SE Field and Specialty examiners, excluding Estate and Gift Tax.

  3. Policy Owner. The Director, Examination Field and Campus Policy, which is under the Director, Headquarters Examination.

  4. IRM Owner. Field Examination Special Processes (FESP), which is under the Director, Examination Field and Campus Policy.

  5. Primary Stakeholders. SB/SE Collection Division is the primary stakeholder of the examination collectibility program.

  6. Contact Information. To recommend changes or make any suggestions related to this IRM section, see IRM, Providing Feedback About an IRM Section - Outside of Clearance.


  1. This IRM provides an overview of the collectibility program for SB/SE examiners. Examiners must strive for quality assessments and promote an increased emphasis on early collections in the continuing effort to reduce the Collection function's inventory and currently not collectible (CNC) accounts. Examiners are required to consider the collectibility of a potential tax assessment during the pre-contact, audit, and closing phases of an examination. The keystone of our compliance activities is to promote voluntary compliance, and examinations contribute to that by having an impact on changing taxpayer behavior and also providing a deterrent to other potentially noncompliant taxpayers.


  1. By law, the Service has the authority to collect tax under Title 26, Internal Revenue Code, Subtitle F - Procedure and Administration, which includes but is not limited to, the following IRC sections:

    • IRC 6155, Payment on notice and demand.

    • IRC 6301, Collection Authority.

    • IRC 7801, Authority of Department of the Treasury,

  2. Also, the following policy statements:

    • IRM 1.2.13, Policy Statements for the Examining Process.

    • IRM 1.2.14, Policy Statements for Collecting Process Activities.


  1. The Director, Headquarters Examination, is the executive responsible for providing policy and guidance for field employees and ensuring consistent application of policy, procedures, and tax law to effect tax administration while protecting taxpayers' rights. See IRM, Headquarters Examination, for additional information.

  2. The Director, Examination - Field and Campus Policy (formerly known as the Director, Examination AUR/Policy), reports to the Director, Headquarters Examination, and is responsible for the delivery of policy and guidance that impacts the field examination process. See IRM, Exam/AUR Policy, for additional information.

  3. Field Examination Special Processes (FESP), which is under the Director, Examination - Field and Campus Policy, is the group responsible for providing oversight and policy and procedural guidance on specialized examination processes to SB/SE field examiners and group managers. See IRM, Examination - Field and Special Processes.

Program Reports

  1. Periodic program reviews are conducted by FESP to:

    • Assess the effectiveness of specific programs within Examination or across the organization,

    • Determine if procedures are being followed,

    • Validate policies and procedures, and

    • Identify and share best/proven practices.


  1. The following table lists commonly used acronyms and their definitions as used throughout this IRM:

    Acronym Definition
    CNC Currently not Collectible
    CSED Collection Statute Expiration Date
    FinCEN Financial Crimes Enforcement Network
    LUQ Large, Unusual, and Questionable
    NRP National Research Program
    OIC Offer in Compromise
    RO Revenue Officer
    TC Transaction Code
    TEFRA Tax Equity & Fiscal Responsibility Act of 1982
    TFRP Trust Fund Recovery Penalty

Related Resources

  1. The following table contains related IRMs which cover additional procedures that examiners may use in collectibility scope considerations and are referenced throughout this IRM section:

    IRM Name
    IRM Servicewide Policies and Authorities-Policy Statement 5-133
    IRM Pre-Contact Responsibilities-Limiting the Scope
    IRM General Collectibility Procedures-Examiner’s Responsibilities
    IRM Soliciting Payment-Coordination with Collection
    IRM 4.27.1 Bankruptcy-Bankruptcy Petitions

General Collectibility Considerations

  1. A decision to limit the scope of the examination should be made only after all facts and circumstances have been considered. Examiners must apply the considerations described in (2) through (11) below in all examinations where applicable:


    Examiners must document all steps taken in the determination of collectibility on the appropriate Lead Sheet as stated in IRM, Examiner’s Responsibilities.

  2. Examiners will review AMDISA or Form 5546, Examination Return Charge-Out Sheet, to determine if the collectibility indicators are present. The code is located in the middle left section of an AMDISA and under "examiner alert" in the Remarks section of Form 5546.

    Code Indicator Definition
    B BANKRUPTCY Currently in bankruptcy or bankruptcy discharge in prior period
    N CURNOTCOLL Prior period closed as Currently Not Collectible
    C CCOLLSTCD26 Open Collection status (assigned to RO, Automated Collection, or in Collection queue)
    O OIC Offer in Compromise pending
  3. Examiners may use Form 9439, Collectibility Evaluation Form, as a job aid in evaluating collectibility if any of the following situations are applicable in the examination:

    • Defunct corporation - A corporation where no assets exist to satisfy any part of the liability and there is no possibility of transferee liability.


      This also applies to other business entities, such as LLCs. Some LLC liabilities can be collected through the TFRP. IRM 5.1.21, Collecting from Limited Liability Companies, is used by Collection to address LLC entities and includes a section on TFRP as it applies to LLC entities. If an examiner notes high wealth accumulation by a shareholder/member, and a history of opened and closed entities, this could indicate the individual is using entities as a way to avoid tax liabilities.

    • Deceased taxpayer - A deceased taxpayer where no estate exists to satisfy any part of the liability and there is no possibility of transferee liability.

    • Departed taxpayer - A foreign national who has left the U.S. (with no expectation of return) and there are no identifiable assets in the U.S. to satisfy any part of the tax liability and/or collection cannot be pursued due to the terms of or lack of a tax treaty

    • Detained taxpayer - A taxpayer whose minimum period of incarceration is equal to or exceeds the normal collection period (generally 10 years from the assessment) and no identifiable assets exist to satisfy any part of the tax liability.

    • Debilitating condition - A taxpayer who has minimal assets and earning potential due to advanced age, illness, or debilitating condition which permanently diminishes income producing potential.

    • Other - A situation not described above in which good business sense dictates that the scope be limited. Please note that an outstanding tax balance is not in and of itself a reason to limit the scope.

  4. Examiners should evaluate (using pre-audit information such as from IRM, Examination of Income,) the taxpayer’s current and future financial potential. Considerations include the following:

    1. What is the current position of the taxpayer? (The position represented on the tax return under examination is the past financial position.)

    2. What are the taxpayer’s current earnings?

    3. What assets does the taxpayer currently own?

    4. What is the taxpayer’s future earning potential?

  5. Examiners will consider the CSED when evaluating future earning potential or future financial position. In general, Collection will have ten years from the date of the assessment to collect a liability. The CSED is the last date the IRS has to collect an outstanding balance due on an account, unless the CSED is extended by case action, event, or waiver secured in connection with certain installment agreements.


    Taxpayer is in his early 40s and just started a new business that seems to be very successful based on current assets and your internet research. However his IMFOLI shows very large outstanding balances from a failed business venture from nine years ago. Since the IRS only has a year remaining to collect these balances, they should not be a factor in your decision regarding scope.

  6. The effect on compliance should always be a part of the decision to limit the scope. The scope should not be limited if it would have an adverse impact on voluntary compliance. Equitable treatment of all taxpayers must be a factor in compliance considerations.


    If collectibility indicators are present and a decision made to continue the audit, a conference must be held with the manager and potential compliance impact documented on the appropriate lead sheet as stated in IRM

  7. If indications of fraud are present or the taxpayer is manipulating assets to portray a lack of resources, the scope should not be limited. The FinCEN database may be queried for transactions concerning the taxpayer. This may reveal a different financial condition than otherwise disclosed by the taxpayer.

  8. If the taxpayer has filed for bankruptcy, contact your Technical Services Exam Bankruptcy Coordinator, as provided by state via the following link: http://mysbse.web.irs.gov/examination/tip/bankruptcy/contacts/12268.aspx, for information on the bankruptcy and assistance. See IRM 4.27.1, Bankruptcy Petitions.


    A bankruptcy filing is not determinative in the decision to limit the scope of an examination. Relevant factors to consider are the bankruptcy chapter filed, whether there are assets and if there is potential for collection after the bankruptcy is over.

  9. For non-filed returns, examiners should apply IRM, Policy Statement 5-133 (six year enforcement period). On a case-by-case basis, examiners may limit the number of delinquent returns to secure based on collectibility.

  10. Collectibility considerations do not apply to National Research Program (NRP) returns and TEFRA partnerships. In the case of TEFRA investors where partnership items have been converted to non-partnership items, collectibility will be considered.

  11. At all points in the examination, examiners are to use professional judgment when considering the facts and circumstances to determine the scope and depth of examinations. The following examples provide guidance on the application of the considerations and the resulting effect on the examination:


    Examiner is assigned a Form 1040 return with a CNC indicator. The taxpayer owns a Schedule C construction business. During the preaudit, the examiner finds many LUQ expenses which appear to be personal. Based on professional judgment and the effect on voluntary compliance, the examiner makes the determination to continue the exam and documents this decision on the appropriate lead sheet as stated in IRM


    If the taxpayer is deceased but the estate has assets and the return contains LUQ items, examination will not be limited simply because the taxpayer is deceased. However if there are no assets and/or low audit potential, the case could be surveyed.


    Examiner is assigned a Form 1040 with an OIC indicator. An OIC indicator is generated from a TC 480 (pending OIC) or TC 780 (accepted OIC) on the module. The examiner should not proceed with the examination because no additional assessments or abatements may be made to the module unless the taxpayer supplied false information or concealed assets, or both the taxpayer and the government misunderstood a material fact.


    Examiners should apply the above collectibility considerations at the earliest time they are identified and discuss limiting the scope with their group manager.

Processing Procedures

  1. Examiners will discuss all facts and circumstances regarding potential collectibility issues with the group manager when collectibility indicators exist. During this discussion, a decision is made to survey, limit the scope, or continue the examination. The discussion with the group manager:

    • May lead to a consultation with Collection using local procedures per IRM, Coordination with Collection, and

    • Must be documented on the appropriate lead sheet as outlined in IRM

  2. If the taxpayer has not been contacted, the return may be surveyed based on assessment of collectibility outlined in IRM, General Collectibility Considerations. Form 1900, Income Tax Survey After Assignment, is completed, documenting the collectibility reasons for the survey. After approval by the group manager, the form is retained in both the physical and RGS/IMS electronic case files.

  3. Based on facts and circumstances, the decision may be made to limit the scope during the preaudit. Examiners will document reasons for limitation and planned scope in the appropriate lead sheet as stated in IRM For example, the examiner should list which LUQ items will be examined and the basis for their decisions. See IRM, Limiting the Scope.

  4. Once an examination has begun and a decision is made to limit the scope, the examiner will prepare a report at the earliest possible opportunity. The following adjustments should be included in the examination report:

    1. Adjustments in the taxpayer's favor

    2. Automatic disallowances

    3. Statutory adjustments

    4. Other issues fully developed up to the point of limiting the scope of the examination

  5. When collectibility indicators are present and a decision is made to not limit the scope, the examiner will document the decision and reasons on appropriate lead sheet as stated in IRM