The taxpayer can seek “Hardship Status” when their financial condition leaves them with no money available for delinquent taxes. “Hardship Status” has an alternate name: “Currently Not Collectible”. Hardship status can delay IRS collection action for up to 18 to 24 months or longer. Interest and penalties will continue to accrue. The taxpayer should use this period to organize their finances.
Hardship status must be the result of special circumstances causing the taxpayer’s personal life to be in chaos. The IRS is expert at discovering a taxpayer’s capacity to pay taxes owed.
The taxpayer’s financial condition must be at a point where household expenses aren’t met. The IRS has strict guidelines as to what makes up household expenses. Examples of “special circumstances” that can lead to financial hardship and support a “Hardship Status” classification include:
- Divorce, separation and spousal issues. Examples of issues related to the spouse are: forgery, abandonment and tax problems.
- Pregnancy, child rearing and special education needs. These issues will often need a spouse to stop working.
- Number of dependents. As the number of household dependents increases the family income becomes more strained.
- Death in the family. This event can cause loss of income, added expenses and issues like stress.
- Physical and psychological disabilities and other health issues. These issues can reduce income, increase expenses and increse time commitments.
- Addictions. Alchohol, drug and gambling addictions can lead to disruptions in family finances and tax compliance. The IRS wants taxpayers to support all claims.
- Advanced age. This special circumstance can cause declining income, higher living expenses and forgetfulness.
- Employment problems. The loss of a job, industry recession, a spouse working away from home and time spent looking for a new job can all cause financial hardship.
- Retirement. Retirement of a taxpayer, a spouse, a parent or any other income contributor can stress the family finances.
- Other financial problems like casualty loss (fire, accident, flood, storm etc.), stock market losses, increased mortgage payments, business losses, bankruptcy, imprisonment, military service and child or spousal support needs.
It is a good idea to get the help of an expert to do some financial planning before seeking hardship status. A tax problem specialist is familiar with how the IRS will calculate your true capacity to pay. By doing this the taxpayer can avoid wasting time applying for a hardship status that they wouldn’t qualify for.
Owning significant liquid assets such as bank, money market or brokerage accounts, or a cash value life insurance policy can easily disqualify the taxpayer from hardship status.
Even if you qualify for hardship status, it is not permanent and may last up to 24 months before the IRS reevaluates your status. The taxpayer will have to present financial disclosure forms to the IRS periodically.
To keep hardship status, the taxpayer must remain in “current compliance” with IRS requirements. All tax returns must be filed, payroll withholding must be enough and estimated payments must be current.