Taxation & Estate Planning

Is there such a thing as a ?hardship status? with the IRS?

By howardlevy

If you cannot pay your delinquent taxes because of an economic hardship, the IRS can suspend collection efforts against you.  This does not mean your debt is forgiven; just that the IRS will defer collection and not take your wages or bank account.

Internal Revenue Service Policy Statement 5-71 permits hardship status on IRS accounts, as follows:

If there are limited assets or income but it is determined that levy action would create a hardship, the liability may be reported as currently not collectible. A hardship exists if the levy action prevents the taxpayer from meeting necessary living expenses. In each case a determination must be made as to whether the levy would result in actual hardship, as distinguished from mere inconvenience to the taxpayer.  If, after taking all steps in the collection process, it is determined that an account receivable is currently not collectible, it should be so reported in order to remove it from active inventory.

Internally within the IRS, hardship aka currently not collectible, is known as a “53″ case, for the transaction code the IRS inputs into your account to indicate a suspension of collection activities.  

To obtain hardship status, the IRS requires a complete financial disclosure of your monthly income and living expenses, as well as a valuation of your assets and liabilities.  The IRS will compare your monthly expenses to their charts of food and clothing, housing and utilities and car expenses.  For example, if you have a $600 monthly car payment, the IRS will object to hardship status.  Your car payment, according to their charts, would be too high for you to claim a hardship.  

The IRS requires you to have no cash flow to be a hardship.  You may think you have a zero budget; the IRS may feel differently.  There are procedures to give you time and opportunity to adjust your budget.  For those who cannot adjust expenses to the satisfaction of the IRS, sometimes a Chapter 7 or Chapter 13 bankruptcy is a better option to eliminate the taxes.  You can learn a little more on bankruptcy and the IRS here.  

Economic hardship does not forgive interest and penalties.  Expect the amount you owe to double every five years from the running of interest and penalties.  

In many situations, being on a continued hardship status is an effective method for resolution of an IRS liability.  The IRS has 10 years to collect the amount you owe.  After the 10 years lapses, the IRS will clear the account balances to zero, as required by law (read more on that here).  

The IRS can also settle a hardship case by submission of an offer in compromise rather than have it linger in the system.  

A comparison between the pros and cons of resolution by sitting on a hardship status, filing bankruptcy or submitting an offer in compromise is essential to resolving a tax delinquency.  No option should stand alone.  

Full post as published by IRS and the Law on January 09, 2009 (boomark / email).