The IRS acknowledges financial hardship as a legitimate reason for tax relief — as long as a taxpayer can prove it.
A Guide to Proving Financial Hardship to the IRS
Step 1. Know How the IRS Defines ‘Financial Hardship’
The phrase ‘financial hardship’ means different things to different people. It is usually dependent on the kind of lifestyle a person is used to.
However, as for the IRS, this phrase has a clear-cut definition.
IRS hardship refers to a taxpayer’s inability to afford necessary and reasonable living expenditures. The operative words here are “necessary” and “reasonable.”
The IRS considers expenses relating to rent or mortgage, sustenance (food and drink), education, utilities, health care, basic clothing, personal care, and transportation as both necessary and reasonable. Meanwhile, it excludes credit card payments and opulent lifestyle expenditures.
Step 2. Be Informed Regarding National Financial Standards
The IRS compares a taxpayer’s living expenses with its Collection Financial Standards to ascertain the legitimacy of a claimed financial hardship. This financial standards sheet covers core living expenses.
Core living expenses include these categories:
- Food, Clothing, and Other Items (based on the Bureau of Labor Statistics Consumer Expenditure Survey)
- Out-of-Pocket Health Care Expenses (from Medical Expenditure Panel Survey)
- Housing and Utilities (based on U.S. Census Bureau, American Community Survey, and BLS records)
- Transportation (based on nationwide ownership costs and operating costs derived from the Census Region and Metropolitan Statistical Area (MSA)
Remember that each of these categories follows specific terms.
For instance, health care expenses do not cover medical insurance payment. This category is also age-dependent.
As for the Food, Clothing, and Other Items category, the IRS monthly expense allowance depends on the size of your household. For families of four, IRS allowed expenditures amount to as much as $1,694.
You may want to refer to these nationally established standards to aptly gauge the likelihood of the IRS granting you tax relief due to financial hardship.
Step 3. Gather Essential Documents
The IRS asks for documentary evidence to evaluate whether a taxpayer truly can’t afford to pay taxes. These documents normally cover the basics, such as monthly grocery bills, utility bills, out-of-pocket medical bills, and household and personal care receipts.
The IRS may also ask for car payment receipts, lease agreement or mortgage loan records, and even spousal and child support payments. The extent of the documents the IRS will solicit from a taxpayer claiming financial hardship depends on the severity of their case.
You must collect and organize these records prior to filing financial hardship. Remember that the ease in which an IRS agent gets to review your records may affect the eventual determination of your case.
Many taxpayers apply for tax relief via financial hardship on a yearly basis. Unfortunately, the IRS can only accommodate a certain number of these cases.
It is in your best interest to get noticed through simple strategies such as submitting thoughtfully organized records.
Step 4. Apply for a Currently Not Collectible (CNC) Status
Should your financial documents prove that you earn less than what you need, per the allowable expenses outlined by the IRS, you will likely be granted the IRS uncollectible status (Status 53). This is the best-case scenario for taxpayers under dire financial circumstances.
The IRS halts all collection efforts directed toward a delinquent taxpayer who has qualified for a CNC status. In this case, stoppage of collection efforts mean the lifting of liens and levies, wage garnishment suspension, cessation of letters and phone calls, suspended reporting of credit, and deferred tax debt payment.
Wage Garnishment Definition: A court-issued mandate for automatic deductions to be made from your salary to pay off a creditor.
However, keep in mind that a CNC status does not erase your tax debt. Your outstanding back taxes remain; payment is simply suspended until you are able to get back on your feet.
The expiration of a CNC status is not time-bound. Once you qualify for it, the IRS will determine the amount of income you need to sufficiently cater to your living expenses.
As soon as your most recent tax returns reveal that you have already earned the IRS-calculated amount, your CNC status will be lifted. Your back taxes can only be considered permanently uncollectible when its ten-year Statute of Limitations has expired.
Step 5. Accomplish the Collection Information Statement Form
To prove economic hardship, you must accomplish IRS hardship forms. These forms are collectively called the Collection Information Sheet (CIS).
An IRS agent will ask you to complete either of these forms, depending on the extent of their needed information. The IRS will use these forms to assess your living expenses against the agency’s established financial standards.
Take note that completing these forms can sometimes prove a bit straining to the uninitiated. This leads us to our next step.
Step 6. Speak to a Professional Tax Consultant
Professional tax consultants know the ins and outs of all IRS-related concerns. This includes proving financial hardship for the purpose of receiving tax relief.
Working with a tax consultant will give you peace of mind. You know that you are working with an expert who can give you sufficient guidance throughout your case.
Proving financial hardship to the IRS can sometimes devolve into an elaborate, exhausting process. Having a tax professional by your side can be a relief in itself.
The IRS provides financial leeway to taxpayers in a dire financial situation. To be eligible, you just have to prove to the agency that you are currently going through a rough patch, money-wise.
Please do not hesitate to raise questions in the comments section below.
If you owe back taxes, visit taxreliefcenter.org for more information on tax relief options.