The Internal Revenue Service (IRS) allows taxpayers certain relief to their tax debt if they are experiencing financial hardship. To prove financial hardship to the IRS, you’ll need to complete a Collection Information Statement (Form 433-A, 433-B, or 433-F) that details your income, expenses, and assets.
The IRS then compares your financial situation against its Collection Financial Standards to determine if you can pay your tax debt while still covering basic living expenses. If you qualify, the IRS may place your account in Currently Not Collectible status or accept an Offer in Compromise to settle your debt for less than you owe.
At John D’Amato, PLLC, we help New York residents facing IRS collection actions understand their options and document their financial situations effectively. Our experience with bankruptcy and IRS solutions gives us insight into how the IRS evaluates hardship claims and what documentation strengthens your case.
What Does Financial Hardship Mean to the IRS?
The IRS defines financial hardship as a situation where a taxpayer can’t pay reasonable basic living expenses while also paying their tax debt. According to the IRS Internal Revenue Manual (IRM), hardship generally means having no income or assets, no equity in assets, or insufficient income to make any payment without causing hardship.
The definition of hardship does not only mean the inability to pay reasonable basic living expenses based on income, allowable expenses, and equity. “Hardship” also means you would not be able to meet basic expenses or would suffer long-term financial damage if the IRS pursues collection actions against you.
The determination isn’t based on your subjective feeling of financial stress. Instead, the IRS uses objective standards that vary by location and family size. These standards cover housing, utilities, food, clothing, transportation, and out-of-pocket healthcare costs.
How the IRS Measures Your Ability to Pay
The IRS uses two types of expense standards when evaluating hardship claims. National standards apply uniformly across the country for food, housekeeping supplies, clothing, personal care, and miscellaneous expenses. These amounts are based on Bureau of Labor Statistics Consumer Expenditure Survey data and vary only by household size.
Local standards vary by geographic location and cover housing, utilities, and transportation. For New York residents, housing allowances differ significantly between counties. According to the IRS local standards for New York, housing and utility allowances account for mortgage or rent, property taxes, insurance, maintenance, gas, electric, water, and related costs.
Taxpayers are typically allowed the standard amount or the amount they actually spend, whichever is less. However, the IRS has discretion to allow actual expenses if facts show the standards are inadequate for basic living needs.
Required Documentation for Hardship Claims
Proving financial hardship starts with completing the right Collection Information Statement. The IRS uses three main forms depending on your situation:
- Form 433-F is the simplified version used for most situations. It covers your bank accounts, investments, real estate, employment information, non-wage income, and monthly expenses.
- Form 433-A is the detailed statement for wage earners and self-employed individuals. It requires comprehensive information about assets, income sources, and a full breakdown of monthly living expenses.
- Form 433-B applies to businesses and collects information about business assets, accounts receivable, and business income and expenses.
According to the IRS guidance on delaying collection, you should be prepared to provide proof of your financial status, including information about assets and monthly income and expenses.
Supporting Documents You’ll Need
Beyond the collection information statement, the IRS may request verification documents. These typically include:
- Recent pay stubs or earnings statements
- Bank statements for all accounts
- Mortgage or rental agreements
- Utility bills
- Vehicle loan statements
- Documentation for any special circumstances like medical conditions or job loss.
Having these ready speeds up the review process and strengthens your hardship claim.
“Currently Not Collectible” Status
If the IRS determines you can’t pay any of your tax debt, they may report your account as Currently Not Collectible (CNC). This designation temporarily delays collection activity until your financial situation improves.
It’s important to understand what CNC status does and doesn’t do. While your account is in CNC status, the IRS generally won’t levy your assets or income. However, according to the Taxpayer Advocate Service, interest and penalties continue to accrue, and the IRS may keep your refunds and apply them to your debt.
The IRS may also file a Notice of Federal Tax Lien to protect its interest in your assets, even while collection is suspended. CNC status is temporary, and the IRS will periodically review your ability to pay.
Offer in Compromise as an Alternative
An Offer in Compromise lets you settle your tax debt for less than the full amount you owe. According to the IRS, this may be a legitimate option if you can’t pay your full tax liability or doing so creates a financial hardship.
The IRS considers any of these three grounds for accepting an offer:
- Doubt as to collectability applies when you don’t have enough income or assets to pay the full debt.
- Doubt as to liability applies when there’s a genuine dispute about whether you owe the tax.
- Effective tax administration applies when you can pay, but doing so would create economic hardship or be unfair due to exceptional circumstances.
For offers based on doubt as to collectability, you’ll need to submit Form 656 along with Form 433-A (OIC) or Form 433-B (OIC). The process requires a $205 application fee and an initial payment, though low-income taxpayers may qualify for fee waivers.
How John D’Amato Approaches Hardship Cases
Attorney John D’Amato understands that IRS collection notices create stress for New York families and businesses. The key to a successful hardship claim lies in thorough documentation and presenting your financial picture clearly.
We help clients gather the right supporting documents, complete collection information statements accurately, and present their cases in ways the IRS will accept. When hardship situations involve both IRS debt and other financial pressures, we can also evaluate whether bankruptcy might provide additional protection or relief.
IRS Collection Program Data
According to the IRS Fiscal Year 2024 Data Book, IRS collection totaled almost $77.6 billion during fiscal year 2024, representing a 13.6% increase from the prior year. The data also shows that more taxpayers settled tax debts through installment agreements during this period.
The same report indicates that taxpayers proposed 33,591 offers in compromise during fiscal year 2024. The IRS accepted 7,199 of these offers, amounting to $163.4 million in settled tax debt. These numbers show that while the IRS does accept hardship-based settlements, proper documentation and realistic offers are essential.
Frequently Asked Questions
How long does Currently Not Collectible status last?
CNC status is temporary. The IRS will periodically review your financial situation to determine if you can begin making payments. The frequency of reviews depends on your circumstances, but the IRS typically reassesses accounts annually.
Will I still owe penalties and interest while in hardship status?
Yes. Being placed in Currently Not Collectible status stops active collection efforts, but your debt continues to grow. Interest and penalties accrue until you pay the full amount. This is why some taxpayers consider an Offer in Compromise to permanently resolve their debt.
Can I get help if I can’t afford a tax professional?
Yes. Low Income Taxpayer Clinics provide free or low-cost assistance to taxpayers who meet income guidelines. These clinics can help with collection disputes, appeals, and other IRS issues. New York has multiple LITC locations, including clinics in Albany, Buffalo, and New York City.
What happens if my Offer in Compromise is rejected?
You can appeal a rejection within 30 days using Form 13711, Request for Appeal of Offer in Compromise. The IRS Independent Office of Appeals will review your case. During this time, the collection statute remains suspended.
Key Points to Remember
- Financial hardship to the IRS means you can’t pay basic living expenses while also paying your tax debt.
- You must complete a Collection Information Statement (Form 433-A, 433-B, or 433-F) with supporting documentation.
- The IRS uses national and local standards that vary by location and family size to evaluate your expenses.
- Currently Not Collectible status pauses collection but doesn’t stop interest and penalties from accruing.
- An Offer in Compromise may let you settle your debt for less if you qualify based on your financial circumstances.
Contact Attorney John D’Amato for Help With Your IRS Solutions Case
Facing IRS collection actions is stressful, but you have options. Understanding the hardship process and presenting your case properly can make a real difference, helping you obtain tax debt relief when you need it.
John D’Amato is a respected bankruptcy and IRS solutions attorney serving clients throughout New York. Visit John D’Amato’s profile to learn more about his experience and approach.Call (716) 703-9099 to schedule a free consultation.