For every 35 cents the IRS spends, the department collects $100 in revenue. One reason why the IRS has such a high collection rate is they don’t waste resources going after individuals who simply cannot pay the debt they owe.
Individuals who can’t afford basic living expenses and their tax debt often apply for the IRS hardship program. Once their case gets evaluated, individuals who qualify might get approved for more time to pay off their debt or other types of relief. If you currently owe the IRS a significant chunk of money but live paycheck to paycheck, then you should investigate IRS hardship rules to see if you’re eligible for this type of financial relief.
Learn everything you need to know about IRS hardship and how to apply below.
What Is IRS Hardship?
Did you know that the majority of Americans (61%) didn’t pay any federal income taxes in 2020? While that statistic might initially seem surprising, it makes sense when you consider that an overwhelming number of Americans simply can’t afford to pay their taxes. After all, the 2020 pandemic caused widespread unemployment, financial hardship, and an ever-increasing cost of living.
When you run into unexpected financial hardship, you don’t have to struggle. There are options for you, and the IRS hardship program is one of those options.
“IRS hardship” is a term the IRS uses to define Americans who are in “Currently Non-Collectible” status (CNC) or have agreed to a partial pay installment agreement. These individuals have applied for IRS hardship because they couldn’t afford both their basic living expenses and their tax burden.
Not everyone who is struggling financially meets the IRS hardship requirements, though. Plus, getting filed under CNC does not mean that your tax debt is permanently eliminated. That’s why it’s crucial to understand exactly what the IRS hardship program is and how it can help you.
What Is the IRS Hardship Program?
Getting a tax bill that you can’t pay off is one of the most common tax problems Americans face. If you know you honestly cannot pay off your IRS tax bill right away, then it’s important to recognize the tax burden and respond to the IRS. A failure to act could lead to further collection efforts.
First, you need to reasonably consider whether you can pay any of your tax bill. If you’re currently struggling with financial hardship, then the IRS will take that into account. If the IRS determines you can pay the full amount, then you won’t be eligible for the program. Rather than wasting time and effort going through these motions, take the time to really analyze your finances before considering this program.
Next, you need to learn what the IRS hardship program is about. It’s designed for individuals struggling to meet their reasonable, basic living expenses. You’ll need to prove this fact to the IRS, and they’ll evaluate your situation and the proof you provide. If you qualify for the program, then you’ll get offered relief in the form of either CNC status or a partial payment plan. You may get offered additional time to pay off your debt without further penalties and fees.
Who Qualifies for the IRS Hardship Program?
When you fill out an IRS hardship form, you’ll need to provide detailed information about your financial status, assets, income, spending, and average expenses. All these details are important because they’ll help the IRS determine if you qualify for the hardship program or other types of tax debt relief.
To be eligible for CNC status, taxpayers must prove that paying off their taxes would prevent them from meeting their reasonable living expenses. These “reasonable” expenses include:
• Food
• Clothing
• Housing
• Utilities
• Out-of-pocket healthcare expenses
• Transportation
If you have little to no funds left after meeting these needs, then you could qualify for the IRS hardship program. In most situations, you must also earn less than $84,000 a year.
Hardship Rules
As if qualifying for IRS hardship wasn’t hard enough, you need to understand how hardship rules work. In most cases, you’ll only qualify for this type of relief on a yearly or bi-yearly basis. Often, the IRS will completely review your financial information every two years to determine if you’re still eligible for the program. In cases where a taxpayer’s situation has changed, the IRS may revoke financial hardship status.
Your hardship status will not automatically roll over into a new year when you file taxes. If you need your financial hardship status to roll over, then you’ll need to fill out another IRS hardship form for the year you can’t pay. If possible, the best thing to do is to pay off your new taxes as soon as possible to prevent getting further into debt. Paying off your new taxes will not impact your previous hardship standing.
It’s also crucial to stay current with your tax returns while you’re in hardship status. You still need to file your returns on time. Otherwise, you could face a penalty of 5% of your unpaid taxes. This penalty could get levied every month for up to five months.
Will IRS Collection Efforts Continue?
A common thread on tax FAQs is how to stop IRS collection efforts. When you’re facing a tax levy, a seizure of your assets, or wage garnishment, your situation can feel pretty dire. The good news is that applying for the IRS hardship program and achieving CNC status can stop collection efforts for that tax liability. It is important to understand, though, that you’ll need to get hardship status for all your tax debt in order to stop all IRS collection efforts.
If you’ve been notified about IRS collection efforts, then it’s in your best interests to consider reaching out to tax attorneys who can help you navigate your situation.
How to Apply to the IRS Hardship Program
Filing an IRS hardship application is something that you can do on your own, but it’s advised that you consider speaking with a tax consultant before you do. A tax consultant will ensure that you fill out your application correctly and thoroughly. They’ll also help you collect any documentation and proof to back up your financial claims.
To apply, you’ll first need to fill out IRS form 433-F. This will explain your monthly income, expenses, assets, and liabilities. You’ll need to be as accurate and thorough as possible on this form. If necessary, the IRS may also request a 433-A form, which is a longer and more detailed version of form 433-F. Gather up any documentation that supports what you list in the form.
Once this information is submitted, the IRS will analyze your case. You should get a response from the IRS within a few weeks.
Alternative Payment Plans
If the IRS hardship program determines you can pay back a portion of your tax debt, then they may suggest putting you onto a partial payment plan. This type of alternative payment plan allows you to pay back a portion of your tax debt while also relieving you of the full burden. Depending on your situation, the IRS might also say that you qualify for an extension on your payment time due to the undue hardship you’re facing. If you’re hoping to seek out an extension, then you’ll want to use IRS form 1127.
Another common type of alternative payment plan is an IRS settlement or Offer in Compromise. This type of relief is available for taxpayers who don’t think they’ll be able to pay off their tax debt in the immediate future. Rather than accepting their full tax debt liability, the taxpayer can come to an agreement with the IRS for a reduced amount.
Are You Interested in Applying for the IRS Hardship Program?
The IRS hardship program was designed to help provide financial relief to Americans who genuinely can’t afford to pay off their debt without sacrificing their basic necessities. While the agency’s hardship rules might seem strict, these qualifications are put into place to ensure that no one abuses this financial relief option.
Now that you’re empowered with the knowledge about what the IRS hardship program is, who qualifies, and what it can do for you, are you interested in applying? While you could always try to navigate IRS rules and regulations by yourself, it’s reassuring to have a tax expert by your side. Here at Tax Group Center, our tax attorneys, certified tax consultants, and CPAs have helped countless Americans find tax debt relief through the IRS hardship program and other programs.
Contact us today to learn more about your eligibility and options.
