JULY 31, 2023

IRS Hardship Program EXPLAINED By a CPA Who Knows

The IRS hardship program is a special tax relief program for those who cannot afford to pay their back taxes.

Also known as currently not collectible (CNC) status, getting into the IRS hardship program might be your ticket to escaping the crushing weight that back tax debt is imposing on you.

However, before you attempt to get into the IRS hardship program, it’s important that you understand why the program exists as well as its qualifications.

Basically, in Internal Revenue Manual, which is titled simply “Hardship,” the IRS states that a hardship exists if a taxpayer is unable to pay reasonable basic living expenses.

But what does that mean?  Do you have to be living in a van down by the river?  Do you have to be absolutely destitute?  I’ll get into all that, but first I want to explain what the IRS hardship program is and why it exists before I get into how to get into it.

What Is the IRS Hardship Program?

The IRS hardship program is a special IRS program for certain taxpayers who have proven to the IRS that paying their taxes would cause them economic hardship.

So while taxpayers are in hardship, the IRS cannot collect money from them, such as through wage garnishments or bank levies or even demanding that they pay them money in an installment agreement or voluntarily.

So the benefit of the IRS hardship program is that even though you owe the IRS, you don’t have to pay them any money on your debt.

Now, the IRS will take any tax refunds indicated on your future tax returns to apply them to your back tax debt, even though you’re in hardship, so if you want to maximize your cash flow, you’d probably want to adjust your withholdings to ensure that you’re “breaking even” with the IRS every year — not owing the IRS but not showing a refund either.

Also, penalties and interest continue to accrue on your account if you’re in hardship, and the IRS can remove you from hardship if they believe that your financial position has improved substantially since you were placed into hardship.

The IRS systemically does this annually with many taxpayers when those taxpayers file their tax return, and according to their tax return, they’re making more a lot more money than they were when they were placed into hardship.

That said, while you are in hardship status, the IRS’ statute of limitations on collections — that is, the 10-year clock they have to collect your tax debt from you for a given year — continues to run, meaning that theoretically if you remain in hardship until this time limit runs out, your tax debt will be written off.

Why Does the IRS Hardship Program Exist?

The IRS hardship program exists because it’s required by law.

The legal basis for the IRS hardship program is Internal Revenue Code Section 6343(a)(1)(D), which states that the IRS cannot legally collect taxes by force from a taxpayer if the taxpayer has proven to the IRS that paying their taxes would cause them economic hardship.

So it follows that taxpayers need an avenue to prove to the IRS that paying their taxes would cause them economic hardship, and this avenue is the IRS hardship program.

This program is so powerful that in the case Vinatieri v. Commissioner, the United States Tax Court ruled that the IRS even proposing to levy you while you’re in the hardship program is an abuse of its discretion.

How to File Hardship With the IRS

To file hardship with the IRS, you need to prove to the IRS that you do not have any money left over to pay the IRS after paying reasonable amounts for your necessary living expenses, such as:

  • Food
  • Housing
  • Vehicle Expenses
  • Healthcare Costs
  • Housekeeping Supplies
  • Apparel
  • Personal Care Products and Services

Of course, the IRS is not just going to take your word for it that you don’t have anything left over to pay them after paying these expenses; you’ll have to prove it.

Thankfully, the IRS has a standard protocol for filing hardship with them. Here’s how to file hardship with the IRS in three steps:

Step 1: Complete Form 433-F.

The IRS has standard forms it uses to assess your financial situation; these forms are called collection information statement.

Unless your tax debt has been assigned to a revenue officer — in which case you’d need to use Form 433-A — the first step in filing hardship with the IRS is completing Form 433-F, on which you will indicate basic information about:

  • Yourself
  • Your financial accounts
  • Real estate you own
  • Other assets you own
  • Businesses you own
  • Your monthly income
  • Your monthly necessary living expenses

Note that the IRS can challenge some of your living expenses as excessive and cap them at certain amounts, known as the collection financial standards.

Step 2: Gather documentation.

The IRS will likely ask you to send over some documentation to substantiate the information you indicate on your Form 433-F, so it’s in your best interest to gather the following documents in case they request it:

  • Recent paystubs
  • Last few months of bank statements
  • Loan denial letters to prove you cannot access equity in real estate you own (if applicable)

Step 3: Call the IRS and request hardship.

Finally, you need to submit your hardship request to the IRS.

You can typically do this over the phone by calling the number on the latest notice you received from the IRS or, if you don’t have a notice handy, by calling 800-829-1040.

Does the IRS Hardship Program Lien Proof You?

The IRS hardship program does not lien proof you; if you owe more than $10,000 to the IRS, it’s likely that the IRS will file a notice of federal tax lien against you when you are placed into the hardship program.

Unlike a levy, the IRS does not consider a lien to be a forced collection activity since it’s merely a notification to the general public of the IRS’ claims against you.