What Does the IRS Consider a Financial Hardship?

What Does the IRS Consider a Financial Hardship?

If you ever find yourself in a situation where you owe unpaid taxes to the IRS and struggle to meet basic living needs each month, the IRS offers financial hardship assistance. Qualifying for IRS hardship can help stop collections and give you tax relief to settle your outstanding tax debt.

Read on to learn more about what criteria is required for approval, how it will impact your tax liability, and what you can do if you do not qualify.

How Does the IRS Determine Financial Hardship?

When you apply for hardship for taxes, the IRS assesses your full financial situation from income and assets to expenses. They need proof that enforcing tax collections will make it nearly impossible for you to afford housing, utilities, food, clothing, healthcare, and transportation.

To perform a hardship assessment, the IRS will ask for financial information or documentation of all income and assets. They will also ask for monthly household expenses.

Typically, you will submit an IRS 433 form, also called a collection information statement. This allows the IRS to review your finances. Note that individuals with W-2s or who are self-employed submit form 433-A. Businesses submit form 433-B.

In addition to income, when you submit a 433 Form, the IRS will consider cash, bank account balance, available credit, property, vehicles, investments (including digital assets), life insurance, and personal effects.

What If My Financial Situation Changes During Hardship Evaluation?

Income and assets that change during your hardship evaluation should be disclosed as well. This could include starting a new job, taking unemployment benefits, selling a home or foreclosing.

These life changes could alter the financial position your family is in, possibly changing whether you qualify for IRS hardship.

Does IRS Hardship Stop Tax Liens, Wage Garnishment, and Bank Account Levies?

If the IRS approves financial hardship status, they give relief from collections and help you pay off taxes. The biggest immediate benefit of hardship status, also called Currently Not Collectible, is that it stops IRS collection efforts. Collection efforts can be tax liens, bank account levies, and wage garnishments.

Remember that financial hardship is temporary. Once the IRS determines that your financial situation has improved, and paying your tax debt will no longer prevent you from paying for basic expenses, you will lose financial hardship status and be required to pay the remaining tax balance.

Will Tax Debt Be Forgiven for Financial Hardship?

No. Although hardship status will not eliminate your tax debt, you can submit an Offer in Compromise to see if the IRS will give you a hardship settlement amount that is less than what you owe.

With an OIC, you will have a portion of your tax debt “forgiven,” but will still be responsible for the remainder.

You can also request a long-term payment plan or installment agreement to pay off what you owe the IRS in much smaller monthly payments that make it possible for you to still cover basic expenses.

What Happens To The Interest On My Tax Debt?

Whether you qualify for financial hardship, an Offer in Compromise, or other IRS payment plan, you will continue to accrue interest. In fact, the IRS does not stop adding interest to your balance until you pay off your taxes in full.

Although the IRS will not ever stop interest, in some financial hardship cases you may qualify for penalty relief or abatement.

What If You Don’t Qualify for Financial Hardship?

If the IRS denies your financial hardship request, there are still relief options available to help you resolve your tax debt. Even if you do not qualify for hardship status to stop collections, you can still submit an Offer in Compromise or request an installment agreement.

As long as you have an IRS payment plan and make your monthly payments on time, you will not have to worry about liens, levies, and garnishment. If your payment plan extends into future tax years, the IRS may use any refunds to offset your tax debt depending on your financial hardship situation at that time.

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