Facing a situation in which paying your tax debt would cause you unreasonable financial hardship where you cannot afford your basic living expenses is difficult, especially knowing that failing to pay your tax bill revealed when you file your tax return will result in failure-to-pay penalties, fees, or fines.
While this situation is stressful, if taxpayers are approved for IRS financial hardship, there are resolution options that allow them to improve their income situation without tax payments making their problems worse.
TABLE OF CONTENTS
- IRS financial hardship defines the situation in which taxpayers cannot afford to pay for their basic living expenses.
- The IRS can evaluate the taxpayer’s eligibility for financial hardship status by requesting the taxpayer to fill out a generic collection information statement using IRS Form 433-F, a collection information statement for wage-earners and self-employed individuals using IRS Form 433-A, or a collection information statement for businesses using IRS Form 433-B.
- Taxpayers who are facing IRS financial hardship may qualify for one of the tax debt relief options offered within the IRS Fresh Start Program, such as currently non-collectible status, offers in compromise, or installment agreements.
What Is IRS Financial Hardship?
The IRS definition of financial hardship is when a taxpayer cannot afford to pay for their basic living expenses. If taxpayers are having a problem financially supporting the health and welfare of their families, the added expense of paying their tax bill will only make their situation worse. However, taxpayers who find themselves in this position can sometimes qualify for tax relief options through the IRS that allow them to improve their financial stability before continuing with tax payments.
During the circumstance in which individuals have an unpaid tax balance but are unable to pay due to the need to financially support themselves or their families, they may qualify for IRS financial hardship tax relief options that allow them to reduce their tax debt, pay off their debt in smaller increments, or temporarily be excused from the tax collection process.
What Are Basic Living Expenses?
The IRS considers basic living expenses as the items that are necessary to provide for the individual and their family in regard to their health and welfare. If people have issues affording to pay the amount listed on their tax bill without sacrificing some of these necessary living expenses, the IRS may offer arrangements that allow them to make smaller tax payments, agree on a lower tax settlement amount, or temporarily delay the tax payments until they have a more stable financial situation.
Here is a list of some of the expenses that the IRS considers necessary living expenses:
- Miscellaneous household items, such as for sanitation and hygiene
- Housing or rent
- Healthcare expenses
What Are The IRS Requirements For Financial Hardship?
An individual’s ability to afford their basic living expenses is dependent on much more being considered low income, and the IRS will evaluate their comprehensive financial situation to determine if they qualify for economic hardship status. For a taxpayer to be considered eligible for financial hardship status and be offered tax debt relief to help them through their struggles to prevent their economic situation from becoming even poorer, the IRS will conduct a financial assessment that considers several factors.
During this financial assessment, the taxpayer will be required to disclose their:
- Monthly income
- Monthly living expenses
- Assets value
- Liabilities value
- Employment status
- Number of dependents and their ages
- Cost of living in their city
- Medical circumstances in their family
- Special education expenses
- Extraordinary expenses, such as for natural disasters.
The taxpayer’s income directly impacts their ability to pay their taxes and living expenses, so for this reason, changes in their income can also impact their eligibility for IRS financial hardship status, such as:
- Losing their job and becoming unemployed
- Decline in income
- Looking for a job
- Business of employment closing
- Own business closing
- Forclosing home
- Selling their home at a loss
- Unemployment compensation
What Is A Collection Information Statement?
In order to determine a taxpayer’s ability to pay their tax bills or potentially qualify for tax debt relief options when they are facing economic hardship, the IRS will request detailed financial information by having the taxpayer fill out an IRS Collection Information Statement. Based on the information provided in this form, the IRS will evaluate their tax situation to determine if they can afford to pay any of their tax debt and which form of tax relief they might qualify for.
There are three main types of collection information statements that taxpayers may be required to submit depending on their income and employment situation.
- IRS Form 433-F is the generalized tax collection information statement.
- IRS Form 433-A is the tax collection information statement for self-employed taxpayers and individuals who earn wages.
- IRS Form 433-B is the tax collection information statement for businesses.
Within the tax collection information statement, the taxpayer must provide a list of all of the assets they own that or of value. These items include:
- Bank account funds
- Retirement savings
- Investment portfolios
- Vehicles, such as cars, trucks, and motorcycles
- Real estate
- Life insurance plans
Along with listing the types of assets the taxpayer owns, they must also disclose details about these assets, such as:
- The corresponding market value that each asset currently has
- Documentation or income statements for at least the past 90 days or 3 months
- Receipts or spending statements from the last 90 days or 3 months
- A report of their average income from the past 3 months
- A report of their average expenses based on each category from the past 3 months
IRS Fresh Start Program
The IRS Fresh Start Program is an initiative set forth by the IRS to help eligible taxpayers find tax debt relief during the situation where paying their back taxes would result in them struggling to afford their basic living expenses.
Currently Non-Collectible (CNC) Status
Taxpayers who prove to the IRS that paying the money they owe in taxes and for their regular living expenses will cause them significant economic hardship may be approved to have their tax account flagged as currently non-collectible, and in this situation, the IRS and other government agencies must temporarily stop all tax collection efforts, including levies and liens.
Offer In Compromise
Taxpayers who meet the eligibility requirements for an offer in compromise may be permitted to settle their tax debt for less than what was initially owed.
An installment agreement allows struggling taxpayers to gradually pay back their tax debt through a monthly payment plan rather than being required to pay their full tax liability in one lump sum when they file their income tax return.
How Does IRS Financial Hardship Protect You?
When individuals and businesses fail to pay their tax liability, the IRS may initiate other collection efforts in order to secure payment for what is owed in taxes. However, if upon evaluating the taxpayer’s collection information statement the IRS determines that they cannot reasonably afford to pay their taxes at this time, they may temporarily stop tax collection efforts to allow the taxpayer to get their finances in order.
Taxpayers who are approved for IRS financial hardship through currently non-collectible status are protected from collection methods such as:
If the IRS or a government agency places a federal tax lien on a taxpayer’s assets, this allows them to have a legal claim over those assets in the case that the taxpayer is unable to pay their tax debt.
The types of assets the IRS can place a tax lien on include real estate, personal property, or other financial assets. When taxpayers are approved for IRS financial hardship, the IRS halts collection efforts and therefore, they are protected from having a tax lien placed on one of their assets while their status is listed as non-collectible.
While a tax lien allows the IRS to place a legal claim over a taxpayer’s assets in the case that they are unable to pay what they owe in taxes, a tax levy is a process of actually claiming those assets to secure payment for the tax debt.
In this situation, the IRS can legally seize and sell their property to apply those funds toward their outstanding tax debt. By being approved for IRS financial hardship and having their account listed as non-collectible, taxpayers are protected from having their assets levied.
A wage garnishment is when the IRS or another collection agency contacts a taxpayer’s employer and informs them that instead of issuing the taxpayer’s earnings to them in their paychecks, they must instead send their wages directly to the IRS to pay toward their outstanding tax debt.
Sometimes referred to as wage levies, taxpayers are safe from having their wages garnished if they are experiencing IRS financial hardship and their account is listed as non-collectible.
Do Penalties Continue To Accrue When Taxpayers Are Approved For IRS Financial Hardship?
Although being approved for IRS financial hardship status will allow the taxpayer to temporarily stop paying their tax liability as well as protect their assets from being levied, it is important that taxpayers realize that until their tax debt has been fully paid off, penalties and interest will continue to build up on the value of their tax liability.
The IRS will issue notices in the form of a letter in the mail that will inform taxpayers of their updated tax balance throughout the process, as well as the status of their IRS financial hardship qualification.
Tax problems are even more stressful in the case that you are struggling to financially support the basic needs of yourself and your family, which is why the IRS offers tax debt relief options for qualifying taxpayers who are facing IRS financial hardship to avoid a poor outcome.
If you need assistance in achieving financial hardship status with the IRS to delay the tax collection process until you can reasonably afford to pay your tax debt while also being able to afford your basic living expenses, our tax relief professionals at Ideal Tax are happy to help.