If a taxpayer is unable to pay his or her tax liability, and collection activity would create an economic hardship the IRS will consider placing the account in a “hardship” or currently not collectible status. In considering a taxpayer’s account for “hardship” status the IRS will compare the taxpayer’s monthly gross income against what they call “allowable” expenses. IRS monthly allowable expenses are national averages for food, clothing, miscellaneous expenses, housing, transportation, medical expenses and insurance, as well as proper tax withholding and payments. These “allowable” amounts vary depending on household size and local standards as well.
“Hardship” is a subjective term and even though a taxpayer’s monthly expenses may exceed IRS allowable amounts it doesn’t mean that such status is not warranted or achievable. In some cases a taxpayer may have excessive medical expenses in caring for themselves or a loved one, and “hardship” status may still be granted. In all cases in order to be consider currently not collectible, the taxpayer must provide the IRS with financial information on Form 433A, and supply supporting documentation. If a taxpayer is over IRS allowable expenses in a situation such as the above example, supporting documentation is even more critical. Understand that the IRS is going to look at your circumstances with a critical eye, and frivolous or fraudulent claims in an attempt to gain “hardship” status carry severe penalties, including criminal charges.
Being placed in “hardship” status is not a permanent solution to a tax problem. A taxpayer that is currently not collectible will have his or her status reviewed every 18 to 24 months by the IRS to determine if “hardship” status is still warranted. However, being considered currently not collectible has strategic planning merit if other viable solutions to a tax problem exist. For example if a taxpayer is close to the collection statute expiration date on a given tax assessment, being put in “hardship” status for the remainder of that statutory period would result in the relief of those liabilities once that date has passed. Additionally, a taxpayer may be considering bankruptcy and a temporary placement in “hardship” status may allow a taxpayer to wait out any remaining statutory time necessary before those liabilities become dischargeable in a bankruptcy proceeding. These strategies and techniques require professional analysis in most cases, it’s important to consider such advice before making any decisions in handling your tax problem.
I have prepared a video for you to watch to learn even more about IRS Currently Not Collectible Status.