Financial Hardship

IRS Definition

A hardship exists if a taxpayer is unable to pay reasonable basic living expenses.

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The IRS may agree that you have a financial hardship (economic hardship) if you can show that you cannot pay or can barely pay your basic living expenses. For the IRS to determine you are in a hardship situation, the IRS will use its collection financial standards to determine allowable basic living expenses.

The IRS has standards for food, clothing and miscellaneous; housing and utilities; transportation and out-of-pocket health care expenses. However, if your expenses exceed these standards and you can prove that the additional amount is necessary for the health and welfare of your family or is necessary to produce income, the IRS will likely accept the additional amount.

If you have an unpaid tax balance and are unable to pay basic living expenses, you may qualify for one of the IRS’ hardship payment alternatives. To figure out if you qualify, the IRS will require that you provide detailed financial information by completing a Form 433-F or 433-A, Collection Information Statement. If your financial analysis shows that you are unable to make a monthly payment, there are two alternatives you can consider.

If you can make no payment at all at the current time, you may qualify for currently not collectible status which is a temporary status the IRS will place on your account until your situation improves or until the time the IRS has to collect the taxes owed expires (typically 10 years). The IRS will review your account each year to see if your financial situation has improved.

You can also consider applying for an offer in compromise. If you qualify, the IRS will settle for a payment that is less than what you actually owe. In reality, very few people qualify. The IRS looks at whether you have the income and assets to pay the balance due before the collection statute expires. If you have the income and assets to do so, you probably do not qualify.

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