Having the heat of the IRS on your back is never a fun experience. The unrelenting pressure of the federal government can be incredibly stressful and often intimidating, making back tax relief seem nearly impossible to achieve. Many taxpayers aren’t aware of IRS hardship procedures introduced by the IRS hardship program, and the opportunities it creates for individuals suffering from a tax hardship. Under IRS hardship rules, if a person would face unfair financial hardship after the collection of their outstanding taxes, they may be able to qualify for an “Uncollectible” status. Once declared currently not collectible, the IRS cannot take your paycheck or property in lieu of tax payment. With the help of a tax advocate for hardship, you can begin constructing an alternative repayment plan and clearing your name off the IRS delinquent tax list. To learn more about IRS hardship, if you would qualify, and how to apply for financial hardship, read on. This article contains the ins and outs of the IRS hardship program to equip you with the knowledge necessary for finding back tax relief. Regaining financial freedom might not be as impossible as it seems.

What is the IRS Hardship Program?

Located within Part 5, Chapter 16, Section 1 [IRM 5.16.1] of the Internal Revenue Manual is the provision describing “Currently Not Collectable” or CNC status. Accounts can go into CNC status for a variety of reasons, but the stipulation listed for consideration of IRS hardship states, “collection of the liability would create a hardship for taxpayers by leaving them unable to meet necessary living expenses”.

To prove tax hardship to the IRS, you will need to submit your financial information to the federal government. This is done using Form 433A/433F (for individuals or self-employed) or Form 433B (for qualifying corporations or partnerships). These Collection Information Statement forms and supporting documents report:

  • A list of everything the taxpayer owns (bank accounts, investment portfolios, retirement savings, cars, trucks, motorcycles, boats, real estate properties, life insurance, etc.)
  • A corresponding market value for each asset
  • Income statements for the past three months
  • Spending statements for the past three months
  • Reporting a three-month average of income and expenses based on category

Because the IRS hardship program requires the disclosure of very sensitive financial records, some taxpayers are weary of submitting a Collection Information Statement and instead opt for an online payment agreement instead. These are much easier to qualify for than the IRS hardship program and require much less personal disclosure.

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Who Qualifies for IRS Financial Hardship?

If you’re unable to pay your tax bill because you have just enough money to get by after supporting your family, you might be able to qualify for IRS hardship. The IRS will use the information reported on the Form 433A, 433B or 433F to determine whether the account is eligible for tax hardship. Generally speaking, IRS hardship rules require:

  • An annual income less than $84,000 per year.
  • Little or no funds left over after paying for basic living expenses.
  • Living expenses fall within the IRS guidelines. The IRS includes four categories for allowable living expenses, called “collection financial standards”:
    • Food, clothing, housekeeping supplies, personal care products, and miscellaneous items
    • Out-of-pocket health care expenses
    • Housing and utilities
    • Transportation

To analyze these finances, tally up your total allowable living expenses and deduct that number from your total monthly income; the resulting number is what’s called a “net disposable income,” and what the IRS expects you to pay toward your taxes. By proving you have little to no net disposable income, you can qualify for IRS hardship.

IRS hardship rules state that CNC codes can only be used for “individual or joint IMF assessments, sole proprietorships, partnerships where a general partner is personally liable, and LLCs where an individual owner is identified as the liable taxpayer”. In other words, CNC IRS hardship is generally not intended for most large-scale corporations, but rather individual taxpayers and small business owners. Corporations unable to pay delinquent taxes due to hardship should consider researching bankruptcy laws instead.

What are the IRS Hardship Rules?

If your account is declared CNC under tax hardship, the IRS can no longer impose any collection procedures in an effort to settle your tax debt. Common collection methods include, but are not limited to:

  • Tax Lien

    A federal tax lien is the government’s legal claim against your property when you neglect to pay a tax debt. It protects the government’s interest in your property—including real estate, personal property, and financial assets—until your debt is repaid in full.

  • Tax Levy

    Whereas a lien secures the government’s interest in your property, a levy actually takes it away on their behalf and applies it to your outstanding debt. If you don’t make arrangements to settle your tax debt, the IRS can levy, seize and sell any property you own. If a levy creates immediate financial hardship, it may be released, but that does not mean you are exempt from repaying your debt.

  • Garnished Wages

    Sometimes called wage levies, occurs when the IRS collects a portion of your wages and applies them to your outstanding back tax. A part of your wages may be exempt based on the amount of standard deductions and the number of personal exemptions you claimed, but they will continue to be removed until the amount of overdue taxes is paid, you make other arrangements to settle your balance, or the levy is lifted.

IRS hardship rules can apply to an account for up to 10 years, which is generally how long the IRS has to collect back taxes before the statute of limitations are enforced. The IRS will review the taxpayer’s information every two years to ensure they still qualify for tax hardship. If they find an increase in income and believe it to be within your means to repay your taxes, they will remove the CNC status and revoke the IRS hardship.

While you’re in IRS Hardship, the government cannot take your paycheck, seize your property, or wipe your bank account. However, just because they let up on their collection pressure does not mean your obligations are lifted. IRS hardship program does not stop penalties and interests. As of 2018, the penalties for late filing and paying taxes include:

  • Failure to File

    When you don’t file your tax return by the return due date, April 15th, or by the extended date if you had requested for a tax extension.

    • 5% of unpaid tax to be reported
    • Charged each month (or part of a month) the return is late, up to five months
  • Failure to Pay

    When you don’t pay the tax reported on your return in full by the due date or April 15th (an extension to file doesn’t extend the time to pay).

    • 5% of the unpaid tax; 0.25% during an approved installment period (if the return was filed on time, and taxpayer is an individual); 1% if tax is not paid within 10 days of a Notice of Intent to levy
    • Recurrent charge on the remaining unpaid tax each month until the balance is paid in full or until 25% is reached

Notice how much steeper the penalty is for failure to file versus failure to pay; this is the IRS’s way of encouraging taxpayers to file a tax return every year, even if they’re unable to pay. For this reason, be sure to file your required return each year, even if you face tax hardship.

If your account is currently considered in IRS financial hardship, and you owe taxes for an upcoming year, that status does not automatically roll over; each tax year is considered separately. If possible, it’s best to pay the new taxes promptly, since it likely won’t affect your IRS hardship from the past year(s) and it will prevent incurring further debt. If you’re unable to pay your new taxes, it is possible to request CNC IRS financial hardship for that tax period, but this will become increasingly more difficult each year. As noted, although the IRS will temporarily pause collection methods under CNC financial hardship, but penalties will continue to apply and the IRS hardship rules enforce the eventual repayment of the outstanding taxes through alternative payment plans.

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What are Alternative Payment Plans?

Every year within the IRS hardship program, the government will send you an email stating how much you owe in taxes. If you fall upon a sum of money, they recommend making payments when possible. However, the IRS does offer affordable alternative payment plans for taxpayers facing tax hardship, such as:

  • IRS Installment Agreement

    A payment plan is an agreement to pay back your tax obligations over an extended period of time in a series of installments, and one of the best ways to avoid incurring a lien or levy. You’ll continue to incur interest and fees until the balance is repaid, but locking into an installment agreement can help prevent failure to pay penalties being added to your account in the future.

  • IRS Settlement

    An IRS Settlement (sometimes called an Offer in Compromise) is sometimes a better option than IRS hardship. It’s an available alternative payment option for those who see no capability of paying off their tax debt within the immediate future. Instead, the taxpayer proposes an alternative amount to pay the IRS, and if the government accepts their offer, they compromise and settle the debt with the proposed amount.

How Can I find a Tax Advocate for Hardship?

If you’re faced with IRS financial hardship, your best course of action is to hire a professional tax advocate for hardship. A trusted tax professional will advocate on your behalf and find you the best form of back tax relief, whether it’s in the form of IRS hardship, installment agreement, or settlement. Community Tax provides industry-leading tax advocates for hardship, as well as attorneys to help stop tax liens, levies and wage garnishment. We can alleviate the pressure of the IRS, allowing you to rest a bit easier and know you’re back on track to finding your way out of debt. Contact us today to learn how Community Tax professionals can help make your tax problems a thing of the past.