How you define hardship may be vastly different from how the IRS defines it. And any discrepancy in the financial hardship definition may cause issues when tax time comes around, especially if you are seeking relief of some kind. For that reason, you need to understand what is considered a hardship to the IRS because its financial hardship meaning is what matters.
Read More: Form 1040: What You Need to Know
What Constitutes Financial Hardship?
The inability to keep up with your bills and debt repayments is the definition of hardship in simple terms. But you must prove beyond a reasonable doubt that you cannot pay your taxes, can barely meet your living expenses or may completely fail to do so due to the situation you are in to meet the definition of hardship in IRS terms.
Informing the IRS About Financial Hardship
When you find yourself in financial trouble, you will need to fill in Form 433-A, 433-F or 433-B, depending on whether you are self-employed, an individual or a corporation. In these forms, you will provide details on your individual or business finances, including your income, expenses and assets and their estimated value.
The IRS will then determine if you qualify for the financial hardship program and move your account into the Currently Not Collectible (CNC) status. When you are assigned this status, you will not have to deal with collections due to your tax debts, which means no wage garnishment, asset seizures or bank levies. And you may even end up having your tax debts forgiven.
IRS Standard Allowable Living Expenses
Based on the IRS definition, you have financial hardship if you cannot meet your IRS national standards for allowable living expenses. And when that happens, you may obtain relief when paying the taxes you owe.
The IRS national standards for allowable living expenses include:
- Food expenses (ranges from $400 to $955 for one to four people)
- Personal care services and products expenses (ranges from $42 to $89 for one to four people)
- Apparel and services expenses (ranges from $92 to $259 for one to four people)
- Miscellaneous expenses (ranges from $148 to $358 for one to four people)
- Housekeeping supplies (ranges from $41 to $79 for one to four people)
The limit increases by a total of $341 for every person over four people in a household.
You must prove beyond a reasonable doubt that you cannot pay your taxes, can barely meet your living expenses or may completely fail to do so due to the situation you are in to meet the definition of hardship in IRS terms.
An Offer in Compromise
You can also explore an offer in compromise option (OIC). The option enables you to pay less than the entire tax debt if you will experience financial hardship by doing so. However, not everyone qualifies for this option. For example, if you have filed for bankruptcy, the OIC is off the table.
Read More: What Happens If You Can't Make Federal Tax Payments?
Online Payment Plans
Your best option for avoiding trouble from the IRS is to apply for the online payment plan agreement. Depending on how much you owe and your financial situation, you could opt for a short-term, long-term or full payment plan.
When applying for an online tax payment plan, ensure you propose reasonable payment amounts to improve your chances of approval. If you offer too little, you may face harsher penalties in the long term.
By setting up a payment plan, you will get an extended period to pay what you owe, and you won’t have to worry about the IRS coming after your property.
Taxpayer Advocate Service
It would also be prudent for you to involve the Taxpayer Advocate Service when struggling to pay your taxes due to financial hardship. The independent institution works within the IRS to provide a voice for taxpayers. Its advocates will help you resolve your problems with the IRS and give you advice on how to avoid similar problems in the future.
Sometimes, it may prove impossible for you to pay your taxes on time or in full. But your actions will determine how much trouble you get into with the IRS.
For example, if you can prove you are experiencing financial hardship, you could obtain partial or full tax debt relief provided you are honest about your situation. So, be proactive in dealing with your problems and address your inability to pay taxes by reaching out to the IRS first instead of waiting for it to come after you.
- Community Tax: IRS Tax Hardship
- IRS.Gov: 5.16.1 Currently Not Collectible
- Tax Group Center: Currently Non Collectible (CNC)
- IRS.Gov: National Standards: Food, Clothing and Other Items
- IRS.Gov: Offer in Compromise
- IRS.Gov: Apply Online for a Payment Plan
- Taxpayeradvocate.IRS.Gov: Can TAS help me with my tax issue?
I hold a BS in Computer Science and have been a freelance writer since 2011. When I am not writing, I enjoy reading, watching cooking and lifestyle shows, and fantasizing about world travels.