How do I qualify for an IRS hardship?

Feeling overwhelmed by the Internal Revenue Service (IRS)? Understanding the rules and eligibility for IRS tax hardship programs can feel like finding a safe harbor. It can be stressful to deal with financial struggles, but there are ways that may offer assistance.

Many taxpayers are unaware that the IRS provides options for those experiencing financial difficulties. This lack of awareness often leads to unnecessary struggles. This guide provides information to avoid those problems.

Table of Contents:

• What Exactly Constitutes an IRS Tax Hardship?
  • Qualifying for IRS Hardship Status
  • Calculating Your Disposable Income
  • Who Can Use “Currently Not Collectible” (CNC) Status?
• IRS Hardship Rules and Eligibility
  • Tax Levy Vs Tax Lien
  • Wage Garnishments
  • Duration and Review of IRS Hardship Status
  • Penalties and Interest
• Alternative Payment Plans
  • IRS Installment Agreement
  • IRS Settlement (Offer in Compromise)
  • Electronic Federal Tax Payment Options
  • Maintaining Compliance Even During Hardship
• Frequently Asked Questions (FAQs) About IRS Tax Hardship
  • What is the income limit for IRS hardship?
  • How often does the IRS review hardship status?
  • Can I still file taxes if my account is Currently Not Collectible?
  • What is the difference between a tax lien and a tax levy?
• Conclusion

What Exactly Constitutes an IRS Tax Hardship?

IRS tax hardship means that if you paid your income tax, you wouldn’t be able to cover basic living expenses. It’s not about avoiding taxes. It’s about a genuine inability to pay them.

The IRS uses information from Forms 433A, 433B, or 433F to determine if an account qualifies for tax hardship status. They need a comprehensive view of your financial situation. The Internal Revenue Service assesses both income and expenses.

Qualifying for IRS Hardship Status

There are general guidelines to meet for qualification. Taxpayers often do not know these.

Generally, your annual gross income should be below $84,000. This figure serves as a benchmark for the IRS.

After essential living expenses, there should be minimal funds remaining. This demonstrates a lack of disposable income. The IRS wants to be certain you’re not concealing any assets or funds.

Your living costs must be in line with IRS standards. These standards include:

• Food, clothing, and personal care items.
• Housing and utilities.
• Transportation.

These basics are used to determine an individual’s needs. You can get help to understand IRS tax penalties and avoid future issues.

Calculating Your Disposable Income

The IRS totals your allowable living expenses. These calculations help determine your status.

This total is then deducted from your monthly income. The result is your “net disposable income.”

This is the amount the IRS believes you could allocate to your federal tax obligations. A low or nonexistent disposable income supports a hardship claim.

Who Can Use “Currently Not Collectible” (CNC) Status?

CNC status is typically for individual taxpayers and owners of small businesses. Bigger businesses often possess more substantial financial resources.

It applies to individual taxpayers and small entities. Examples of this are: sole proprietorships, partnerships where a partner is liable, and LLCs with an individual owner identified as liable.

These rules help to maintain the structure. The IRS offers CNC to people who need payment plans or cannot pay.

IRS Hardship Rules and Eligibility

If your account is designated as CNC, the IRS will temporarily halt collection activities. This pause applies to pending payments.

This means that actions like tax liens, levies, or wage garnishments won’t be used against you. Many taxpayers fear these kinds of enforcement measures.

A tax lien represents a legal claim on your property. This is triggered by unpaid tax debts.

Tax Levy Vs Tax Lien

A levy takes further action by seizing your property to settle the debt. This is a tough spot to be in.

A lien is a claim, whereas a levy involves actual seizure of assets. Addressing tax issues early on is critical to avoid this escalation.

Wage Garnishments

Wage garnishment involves the IRS collecting a part of your wages directly from your employer. This method ensures payment by direct intervention.

A portion of your wages might be exempt. However, the garnishment generally continues until the debt is fully settled, or alternative arrangements are made.

Duration and Review of IRS Hardship Status

IRS hardship status can extend up to 10 years. That is set within payment collections. This duration matches the IRS’s statute of limitations for collecting estimated taxes.

The IRS conducts a financial review every two years. If your income improves, they may lift the CNC status.

Penalties and Interest

The IRS won’t seize your assets. But, this does not halt penalties.

Penalties and interest will still grow. It is something to consider when reviewing finances.

Penalties in 2018 for late filing included a 5% charge of unpaid taxes monthly, up to five months. Filing even when unable to pay is advisable, as the failure-to-file penalty is greater. Lessons from past IRS scandals highlight the need for timely and proper filing. It also helps to prevent any type of tax scams from ever happening.

Alternative Payment Plans

The IRS encourages taxpayers to make payments if possible, even during times of hardship. It demonstrates an effort. Other options include:

IRS Installment Agreement

An installment agreement allows you to pay your tax debt over time. This approach can lead to more manageable payment options. It can also help prevent liens or levies.

Interest and fees are still applicable. An agreement, though, can help to avoid further failure-to-pay penalties.

IRS Settlement (Offer in Compromise)

An IRS tax settlement, known as an Offer in Compromise (OIC), might be an option. This can accelerate the resolution process.

An OIC is for taxpayers who can’t pay their full debt soon. An OIC allows you to propose a reduced amount. If the IRS accepts, your debt is settled for that amount.

Electronic Federal Tax Payment Options

The IRS offers various ways to make federal tax payments electronically. The Electronic Federal Tax Payment System (EFTPS) is a free service provided by the Department of the Treasury. You can make payments online or by phone 24/7.

IRS Direct Pay allows you to make payments directly from your bank account. It is a free way to make payments. This can be either a checking or savings account.

You can also use a debit card, credit card, or digital wallet through a third-party provider. Fees may apply when choosing this option. Be sure to weigh the benefits before proceeding.

Maintaining Compliance Even During Hardship

Despite discussions about settlements, continue filing your tax returns annually. A Form W-4 helps you do this.

Preventing future tax problems is crucial. Staying proactive helps avoid additional hardships in the future.

Frequently Asked Questions (FAQs) About IRS Tax Hardship

What is the income limit for IRS hardship?

The general guideline for annual income is less than $84,000. Although, this can vary based on individual circumstances and allowable living expenses.

How often does the IRS review hardship status?

The IRS typically reviews a taxpayer’s financial situation every two years. If you account has hardship status, it is reviewed to make sure. This is to determine if the hardship status is still applicable.

Can I still file taxes if my account is Currently Not Collectible?

Yes, you are still expected to file your tax returns each tax year, even if your account is in CNC status. This maintains compliance and can help avoid future issues. Always get your tax transcript from each year to check things over.

What is the difference between a tax lien and a tax levy?

A tax lien is a legal claim against your property as security for your tax debt, while a tax levy involves the actual seizure of your property to satisfy the debt. Make sure your form w-4 is always filled out.

It’s critical to grasp the details of the rules and eligibility for IRS tax matters. You want to get proper help and assistance.

Whether it involves applying for CNC status, arranging an installment agreement, or considering an Offer in Compromise, take action. Understand the necessary steps, and implement them properly by contacting the IRS for guidance.

Having the IRS go after you is never an exciting experience. The constant pressure of the federal government can be extremely stressful and often intimidating, causing back tax relief seems nearly impossible to achieve. Many taxpayers are ignorant of IRS hardship procedures introduced by the IRS hardship program, as well as the opportunities it creates for individuals suffering from a tax hardship.

Under IRS hardship rules, if a person would face unfair financial hardship after the collection of their outstanding taxes, they may be able to qualify for an “Uncollectible” status. Once declared currently not collectible, the IRS cannot take your paycheck or property in lieu of tax payment. With the aid of a tax advocate for hardship, you can start constructing a substitute repayment plan and clearing your name off the IRS delinquent tax list.

Who Is Eligible for IRS Financial Hardship?

If you have difficulty paying your tax, you might be able to qualify for IRS hardship. The IRS will use the information given on the Form 433A, 433B or 433F to determine whether the account is qualified for tax hardship. Generally speaking, IRS hardship rules require:

• An annual income less than $84,000 per year
• Little or no funds left over after paying for basic living expenses.
• Living expenses fall within the IRS guidelines. The IRS includes four categories for allowable living expenses, called “collection financial standards”:
• Food, clothing, housekeeping supplies, personal care products, and miscellaneous items
• Housing and utilities
• Transportation

To evaluate these finances, tally up your total allowable living expenses and subtract that number from your total monthly income; the resulting number is what’s called a “net disposable income,” and what the IRS anticipates you to pay toward your taxes. By verifying you have little to no net disposable income, you can qualify for IRS hardship.

IRS hardship rules state that CNC codes can only be used for “individual or joint IMF assessments, sole proprietorships, partnerships where a general partner is personally liable, and LLCs where an individual owner is identified as the liable taxpayer”. In other words, CNC IRS hardship is usually not intended for most large-scale corporations, but individual taxpayers and small business owners instead. Corporations unable to pay delinquent taxes as a result of hardship should consider researching bankruptcy laws instead.

What are the IRS Hardship Rules?

If your account is pronounced CNC under tax hardship, the IRS does not have right over any collection procedures in an effort to dispute your tax debt. Common collection methods include, but are not restricted to:

Tax Lien

A federal tax lien is the government’s lawful claim against your property when you neglect to pay a tax debt. It defends the government’s interest in your property including real estate, personal property, and financial assets until your debt is repaid in full.

Tax Levy

While a lien protects the government’s interest in your property, a levy actually takes it away on their behalf and applies it to your outstanding debt. If you don’t make necessary plans to settle your tax debt, the IRS can levy, seize and sell any of your properties. If a levy creates immediate financial hardship, it may be released, but that does not mean you are excluded from repaying your debt.

Garnished Wages

Garnished wages are sometimes called wage levies. It occurs when the IRS collects a portion of your wages and applies them to your outstanding back tax. A part of your wages may be excluded depending on the amount of standard deductions and the number of personal exemptions you claimed, but they will keep removing it until the amount of overdue taxes is paid, you make other arrangements to settle your balance, or the levy is lifted.

IRS hardship rules can apply to an account for up to 10 years, which is usually how long the IRS has to collect back taxes before the statute of limitations are enforced. The IRS will evaluate the taxpayer’s information every two years to make certain they still qualify for tax hardship. If they notice an increase in income and believe it to be within your means to repay your taxes, they will remove the CNC status and revoke the IRS hardship.

While you’re in IRS Hardship, the government cannot take your paycheck, seize your property, or wipe your bank account. However, just because they eased up on their collection pressure does not mean your obligations are raised. IRS hardship program does not stop penalties and interests. In the year 2018, the penalties for late filing and paying taxes include:

Failure to File

This is when you fail to file your tax return by the return due date, April 15th, or by the extended date if you had requested for a tax extension.

• 5% of unpaid tax to be reported
• Charged each month (or part of a month) the return is late, up to five months

Failure to Pay

When you don’t pay the tax reported on your return in full by the due date or April 15th, an extension to file doesn’t extend the time to pay.

• 5% of the unpaid tax; 0.25% during an agreed installment period if the return was filed on time, and taxpayer is an individual; 1% if tax is not paid within 10 days of a Notice of Intent to levy
• Recurrent charge on the remaining unpaid tax each month until the balance is paid fully or until 25% is reached

You should note that the penalty for failure to file is more severe than Notice of failure to pay; this is the IRS’s way of encouraging taxpayers to file a tax return yearly, even if they’re unable to pay. For this reason, ensure to file your required return each year, even if you face tax hardship.

What are the other Payment Plans?

Every year within the IRS hardship program, the government sends you an email stating how much you owe in taxes. If you are buoyant enough, they recommend making payments when possible. However, the IRS does give alternative payment plans within the reach of taxpayers facing tax hardship, such as:

IRS Installment Agreement

A payment plan is an agreement to pay back your tax obligations over an extended period of time in a series of installments, and one of the best ways to keep away from incurring a lien or levy. You’ll continue to incur interest and fees until the balance is repaid, but taking an installment agreement can help stop failure to pay penalties being added to your account in future times.

IRS Settlement

An IRS Settlement, sometimes called an Offer in Compromise is at times a better option than IRS hardship. It’s an available alternative payment option for those who see no capability of paying off their tax debt within the immediate future. Instead, the taxpayer proposes an alternative amount to pay the IRS, and if the government approves their offer, they compromise and settle the debt with the proposed amount.