- The taxpayer’s age and employment status;
- Number, age, and health of the taxpayer’s dependents;
- Cost of living in the area where the taxpayer resides;
Apply for Hardship Status
You need to know!
Most taxpayers receive a refund after filing their tax returns. Some taxpayers owe money to the IRS and will receive a bill for unpaid taxes. Individuals who cannot pay their taxes may use the IRS payment options. If you cannot repay the taxes you owe because of your current financial status, you may qualify for IRS hardship status known as Currently Not-Collectible or CNC.
The IRS Policy 5-71 (aka P-5-71) provides the following definition of hardship status
As a general rule, accounts will be reported as currently not collectible when the taxpayer has no assets or income which are, by law, subject to levy.
A hardship exists if a taxpayer is unable to pay reasonable basic living expenses.
The basis for a hardship determination is from information about the taxpayer’s financial condition provided on Form 433–A, Collection Information Statement for Wage Earners and Self-Employed Individuals or Form 433–B, Collection Information Statement for Businesses.
Generally, these cases involve no income or assets, no equity in assets or insufficient income to make any payment without causing hardship The IRS considers the taxpayer’s income and basic living expenses in determining whether the claim for economic hardship should be accepted. Basic living expenses are those that provide for the health, welfare, and production of income of the taxpayer and the taxpayer’s family.
National and local standard expense amounts are designed to provide accuracy and consistency in determining the taxpayer’s basic living expenses. National and local standards are guidelines.
If the IRS making the determination finds that a standard amount is inadequate to provide for a specific taxpayer’s basic expense, they may allow a deviation from the standards.
The taxpayer is required to provide reasonable substantiation for the deviation.
The taxpayer’s representative may have to strongly advocate on the client’s behalf for a deviation from the collection standards because the IRS typically does not exercise discretion when applying the collection standards. :
In addition to living expenses, the IRS may also take into consideration the following when determining if you qualify for economic hardship:
- Any extraordinary circumstances such as special education expenses, medical hardship, or natural disaster; and
- Whether the taxpayer would suffer an economic loss if forced to move.
Your need for economic hardship status can be backed up by a variety of factors, including a medical condition that prevents you from earning an income, and/or the fact that you are unable to borrow against the value of your assets.
It is crucial to note that your financial circumstances are directly connected to your IRS hardship status, and any one of the following situations might have an effect on your eligibility.
- Job loss
- Unemployment compensation
- Income decline
- Searching for a job
- The employer goes out of business
- Close your own business
- Lose your home through foreclosure
- Sell your home at a loss
If you are unable to meet the standards set for hardship status and have no way to pay your tax bill, you should consider seeking a representative that will advocate for you!
How to Prove Hardship to the IRS
- For the IRS to consider you to be not collectible, you will have to prove that you qualify for the IRS Hardship Program. You will complete and submit IRS Form 433-A or 433-B, which serves as the IRS hardship request form. This form is used to summarize your financial situation. It uses mathematical tests to determine whether or not you meet the definition of financial hardship for tax purposes.
- Form 433 requires the preparation of financial statements and the attachment of documentation and support for your numbers. It is not an easy form to complete. However, the effort to complete Form 433 is worth the reward if it can put a hold on IRS collection activity.
Form 433 determines qualification for the IRS Hardship Program, or Non-Collectible Status based on two calculations.
- First, net equity in assets is calculated. Net equity means fair market value, less debt. A common example of debt is as a mortgage or home equity loan. Assets used for this test includes your residence, automobiles and investments.
- Second, gross monthly income is calculated, less “allowable expenses.” It is important to note that the IRS has very specific guidelines about what are considered to be allowable expenses.
If these two calculations show that you do not have the funds to pay the back taxes, then the IRS will recognize your hardship and you will be deemed to be not collectible. And IRS collection activity for the taxes will come to a stop.