The term “IRS economic hardship” sounds straightforward, but in the eyes of the IRS, it has a very specific, data-driven definition. It isn’t just about feeling “broke,” it’s about proving that paying your tax debt would prevent you from meeting basic, necessary living expenses. At Highland Tax Group, we find that clarifying this concept is the first step toward successful resolution.
The IRS Definition of Hardship
The IRS determines hardship by looking at your income versus your “allowable” expenses. They use National and Local Standards to decide how much you “should” be spending on housing, transportation, and food. Those estimates are rarely realistic, so if your actual expenses exceed their standards, they may ignore the difference unless we can provide a compelling reason.
How to Prove Economic Hardship
Establishing a hardship claim requires the submission of a Collection Information Statement (Form 433-A or Form 433-F). The following documentation is required to verify the claim:
Verified Income Documentation
The IRS requires a minimum of 3 to 6 months of wage statements, 1099s, or business profit-and-loss statements. This data is used to calculate the “Future Income” component of a taxpayer’s equity, which determines the ability to enter a payment plan.
Allowable Living Expenses (ALE)
Documentation must show that expenses fall within the IRS’s permitted categories. This includes housing and utility costs, transportation costs, and out-of-pocket healthcare expenses.
Asset Equity Analysis
Hardship claims require a full disclosure of all assets, including bank accounts, real estate, and retirement funds. The IRS applies a Quick Sale Value (QSV), typically 80% of the fair market value, to these assets. If the total equity in these assets is negligible or if liquidating them would deprive the taxpayer of the means to sustain themselves, a hardship status may be granted.
Public Policy and Equity Factors
In specific cases, hardship can be proven through non-financial factors, such as advanced age, chronic illness, or long-term disability. Medical professionals must document these conditions to show that the taxpayer’s earning potential is permanently impaired.
What Happens Once Hardship is Proven?
If we successfully prove hardship, the IRS may place your account in Currently Not Collectible (CNC) status. This pauses all collection activities, including levies and garnishments. While interest and penalties continue to accrue, it gives you the breathing room you need to get back on your feet.
Let Highland Tax Group Help You
Navigating the IRS’s strict expense standards is difficult. If you believe you are facing an economic hardship, let Highland Tax Group handle the paperwork and the negotiations.