Federal Hardship Tax Relief

by Alia Nikolakopulos ; Updated July 27, 2017

If your financial circumstance makes it difficult or impossible to meet your basic living expenses and pay your federal tax debt in full, you have what the IRS calls an economic hardship. The IRS has several programs that address both your debt and your financial hardship. The program you qualify for depends on how extreme your hardship is. To determine this, the IRS may request information to prove your financial information. Regardless of the program you qualify for, all tax returns must be filed, and if you’re required to make estimated tax deposits you must be current on them.

Payment Plans

If you experience a financial hardship that renders you unable to pay your tax bill in full, the IRS offers payment plans. A standard payment plan runs for 72 months. Your monthly payment is your total bill, including penalties and interest, divided by 72. If you owe less than $50,000, you don’t need to provide financial information. However, if you owe more than $50,000, you must complete IRS Form 433-A and give it to the IRS with documents to prove your income and expenses. The IRS typically files tax liens when you enter into a payment arrangement to secure its interest in your debt. A tax lien does appear on your credit report, and if you sell property, such as your house, the IRS is entitled to a portion of the sales proceeds.

Offer In Compromise

An Offer in Compromise is a settlement with the IRS for less than you owe. The program uses strict calculations to determine if a settlement is appropriate, so not everyone who experiences hardship qualifies. The two basic components of the calculation include your disposable monthly income -- multiplied by either 48 or 60 months depending on the type of offer you’re requesting -- plus the amount of equity you have in assets. You’re not required to sell the assets to get a settlement, but the equity amount is included in what you can settle for.

Currently Not Collectible

If your total monthly expenses are more than your income, you may qualify for the IRS Currently Not Collectible program. If your request is accepted, your debt is not cleared, but the IRS can’t actively collect from you. This means the IRS can’t issue bank levies or wage garnishments, or request payments. However, tax liens may be filed, and if you’re due tax refunds in the future, the IRS will take the refund and apply it to your balance. While in this status, the IRS requests updated financial information every 12 to 24 months to see if you still qualify for the program.

Partial Pay Installment Agreement

If you don’t qualify for an Offer in Compromise or Currently Not Collectible, but can’t afford a regular payment plan, a Partial Pay Installment Agreement is another option. With this payment plan, you pay only what you can afford to pay each month. You must provide financial information to the IRS, as well as documents to prove your income and expenses. With this payment plan, you will pay less than your full balance within the time frame the IRS can legally collect from you. However, similar to the Currently Not Collectible program, the IRS requests updated financial information periodically to make sure your financial situation has not improved.

About the Author

With a background in taxation and financial consulting, Alia Nikolakopulos has over a decade of experience resolving tax and finance issues. She is an IRS Enrolled Agent and has been a writer for these topics since 2010. Nikolakopulos is pursuing Bachelor of Science in accounting at the Metropolitan State University of Denver.