How to Handle an IRS Economic Hardship

Facing a tax debt with the Internal Revenue Service (IRS) that you cannot afford to pay can be a source of stress. The IRS has established procedures for individuals experiencing genuine financial difficulties, providing a path forward for taxpayers in situations of economic hardship.

The federal government recognizes that life events such as job loss or illness can impact a person’s ability to meet tax obligations. These relief programs are not a form of debt forgiveness but are intended to provide breathing room while a taxpayer’s financial situation stabilizes, helping them resolve a tax liability without sacrificing basic living expenses.

IRS Options for Economic Hardship

When a taxpayer faces economic hardship, the IRS offers several relief programs. The two primary options are Currently Not Collectible (CNC) status and an Offer in Compromise (OIC). CNC status is a temporary suspension of collection activities. This means the IRS acknowledges that the taxpayer cannot afford to pay their tax debt at the present time and will pause efforts like wage garnishments or bank levies.

An Offer in Compromise, on the other hand, is an agreement to settle the tax liability for a lower amount than originally owed. This option is for situations where there is doubt as to the collectability of the full amount. While both programs address financial difficulty, CNC is the most direct response for those who currently lack the ability to make any monthly payments. This article will focus on the specifics of qualifying for and obtaining CNC status.

Qualifying for Currently Not Collectible Status

The IRS determines eligibility for Currently Not Collectible (CNC) status through a detailed financial analysis that compares a taxpayer’s monthly income against their allowable monthly expenses. This process is not based on a simple declaration of hardship but on a specific calculation. The core of this evaluation is to determine if paying the tax debt would prevent the taxpayer from meeting necessary living expenses. If allowable expenses exceed income, the taxpayer will likely qualify.

To standardize this evaluation, the IRS uses its Collection Financial Standards for basic living costs. These are divided into National and Local Standards. National Standards cover necessary expenses that are standardized nationwide based on family size, including:

• Food
• Housekeeping supplies
• Apparel and services
• Personal care products and services

Local Standards address expenses that vary by location, specifically housing, utilities, and transportation. For housing and utilities, the IRS sets a maximum allowable amount based on the county of residence and family size. For transportation, the standards account for vehicle ownership costs or public transportation fees.

Required Information and Documentation

To apply for CNC status, a taxpayer must provide the IRS with a comprehensive view of their financial situation. This requires gathering specific documents before contacting the IRS, covering three main categories: income, assets, and expenses. For income, this includes recent pay stubs, proof of self-employment earnings, and documentation for other sources like Social Security or pensions.

Asset information is also required, including statements for all bank and investment accounts. Details about real estate owned, including current market value and outstanding loan balances, are necessary. Information on personal vehicles, such as their value and any associated loan details, must also be collected.

All of this financial data is compiled on a Collection Information Statement, Form 433-F. The form has specific sections for employment information, bank accounts, real estate, and other assets, as well as a section to detail necessary living expenses like housing, food, and transportation.

The Application Process for CNC Status

Once all financial information is gathered and Form 433-F is completed, the next step is to request Currently Not Collectible status from the IRS. The primary method is to call the IRS directly, using the phone number on a recent notice or the general individual taxpayer line. During the call, you will speak with an IRS agent and explain your financial situation.

The IRS agent will conduct an interview over the phone, asking questions based on the information reported on Form 433-F. Following the phone call, the agent will request that the completed and signed form, along with supporting documentation, be mailed or faxed to a specific IRS office.

After the form is submitted, the IRS will review the case, which can take several weeks or a few months. If the request is approved, you will receive a letter confirming that your account has been placed in CNC status and that collection activities have been suspended.

Maintaining and Ending CNC Status

Receiving Currently Not Collectible (CNC) status is not a permanent resolution to a tax debt; it is a temporary pause on collection activities. The IRS will periodically review the taxpayer’s financial situation to see if their ability to pay has changed. These reviews typically occur every one to two years. An increase in income reported on a future tax return could trigger a review and potentially lead to the removal of CNC status.

While an account is in CNC status, the taxpayer has specific responsibilities. The most important is the requirement to file all future tax returns on time and pay any new taxes owed. Failure to remain compliant with future tax obligations can result in the immediate revocation of CNC status. It is also important to understand that while collection actions are paused, penalties and interest on the underlying tax debt continue to accrue.

CNC status will end if the IRS determines the taxpayer’s financial condition has improved to the point where they can afford to make payments. The status can also end if the taxpayer fails to file future returns or respond to IRS requests for updated financial information. The collection statute of limitations, which is ten years from the date the tax was assessed, continues to run while an account is in CNC status, meaning the debt could potentially expire if the taxpayer’s financial hardship persists for the remainder of the collection period.