Not everyone that owes back taxes to the Internal Revenue Service (IRS) can make full payments in one fell swoop. The IRS has many avenues to pay back taxes in instalments, but some people are still unable to clear their tax debt.
If your current financial situation makes it difficult/impossible to pay back taxes and meet your daily living expenses, there are other avenues to explore. It is possible to apply for the IRS Hardship Program, which grants you temporary reprieve from settling your tax debt. Learn more about the IRS Hardship Program in this article.
What Is the IRS Hardship Program?
As mentioned, this program gives taxpayers temporary reprieve on back taxes they owe by placing their account in CNC status (Currently Non Collectible). According to IRS Policy 5-71, your tax liability is considered CNC if you can show that paying the taxes will create hardship.
If you have difficulty repaying back taxes, it may be better to pursue an Offer in Compromise (or settlement) before seeking CNC status. The OIC status allows you to pay a fraction of the debt (which you suggest according to your financial ability) for the liability to be cleared. Meanwhile, the CNC status is temporary; if your financial situation gets better, you will resume payment at a later date.
To apply for CNC status, the IRS requires that you fill one of three forms: Form 433A for individuals, Form 433F for self-employed individuals, and Form 433B for C corporations, S corporations, and partnerships looking for hardship status.
Assessing Financial Health for IRS Hardship Applicants
When you apply for the Hardship Program, the IRS assesses the application to determine whether you qualify for CNC status. Apart from living expenses, the IRS considers the following:
- Number, age, and health status of dependents where applicable
- Your employment status and age
- Health status of close family members
- Cost of living in your locale
- Any extraordinary expenses
They will assess your financial health, checking whether you are able to borrow against assets you own, all your income sources, or inability to work harder because of a medical condition. You should be able to show that:
- You lost your job and are/aren’t receiving unemployment benefits
- Your income has declined
- You have been looking for a job with no success
- You were forced to wind up your business
- You lost your home in foreclosure or sold it at a loss
- Your employer went out of business
Protections of the IRS Hardship Status
During IRS Hardship, the IRS cannot seek repayment of your tax liability, whether through wage garnishment or seizure of property or assets. However, note that the tax liability is not forgiven, and penalties and interest on the loan continue to accrue. Every year, the IRS sends a bill showing the amount owed. You will pay that amount once the Hardship status is lifted.
The CNC status can be held for ten years, and the IRS reviews your income/financial status every two years. They will lift the status if they believe you can now support yourself and dependents. At this point, you must resume payment.
However, you can also pay down your debt if you have extra money while under CNC status. Making payments this way doesn’t affect your CNC status until the next scheduled review.
Need to Handle Your Tax Liability? Look for Tax Professionals
When you are unable to pay your tax liability, it can be difficult to decide the next steps to take. No two people have the same financial situation, which is where tax professionals come in.
At Finishline Tax Solutions, we can represent your best interests to apply for tax relief and negotiate on your behalf with the IRS. Our job is to determine the best solution and even file an Appeal if your request for CNC status is denied. We can also help you to prepare and file your taxes in time.
Contact us today for any other tax-related query.