Struggling to Settle Your Tax Debt? Filing for Financial Hardship Offers a Solution

Staff Writer
January 10, 2019

  • 30 million working Americans are currently not witholding enough each month to pay their taxes in full.
  • The IRS offers many payment plans to help individuals pay off their tax debt in a comfortable and timely manner, depending on their circumstances.
  • If paying off your tax debt will endanger your ability to live a normal life now, you may be able to file for Financial Hardship.

If you are struggling with tax debt, you’re not alone. An estimated 30 million Americans — 21% of the tax-paying workforce — aren’t withholding enough each month to pay their taxes in full. Tax debt frequently starts as a small problem which then balloons in size, and slips out of your control. With an increase in total debt of 0.5% every month your taxes are unpaid, a small debt can quickly become a big one — but if you act swiftly to negotiate a plan with the IRS, it doesn’t have to get that far.

Like any other lender, the IRS is interested in you paying back as much as you can, when you can. However, if you believe that paying back your tax debt would jeopardize your home, your health, and your livelihood, you may be able to file for Financial Hardship and have your debts declared Uncollectible.

What Are My Options For Settling Tax Debt?

The IRS has many payment plans to help individuals pay off their tax debts bit by bit, in a time frame that’s comfortable for them. Plans like the Guaranteed Installment Agreement and the Streamlined Installment Agreement give you the option of paying off your tax debts step by step, with different criteria for entry, depending on the size of your debt. 

Struggling to Settle Your Tax Debt? Filing for Financial Hardship Offers a Solution

If your debt is so large you feel you’ll never pay it back, you might be able to negotiate an Offer in Compromise with the IRS. An Offer in Compromise involves you reaching an agreement with the IRS to pay back less than what you owe, but an amount you can afford, via a payment plan. However, the IRS only accept Offers in Compromise if they think they couldn’t claim more through conventional payment plans and tax liens, which is the seizure of an individual’s property and assets. 

What If I Can’t Pay Off Any Tax Debt Right Now?

If you believe that, in light of your current circumstances, any form of payment plan made with the IRS will endanger your ability to support yourself and your family, you may be able to file for Financial Hardship. This means your debt will be rendered Uncollectible or Currently Not Collectible. 

If you feel swamped and frightened by your debt, declaring Financial Hardship may be the appropriate solution for you.

How Do I Demonstrate Financial Hardship?

In order to have your tax debts declared Uncollectible or Currently Not Collectible, you have to show the IRS how paying these debts will create an unfair economic hardship.

If the IRS claims your tax debt, will you be able to:

  • Feed yourself, or your family?
  • Pay the monthly costs needed to stay in your home?
  • Pay bills?
  • Afford the cost of transport to and from your place of work?
  • Afford any prescription medication or medical treatments you need to sustain a good standard of life?
  • Purchase the clothing you need, for work and your life?

The IRS decides what determines an unfair economic hardship on a case-by-case basis; however, if you answered ‘no’ to the majority of the preceding questions, you are likely to be eligible for Financial Hardship.

As long as your expenses do not show an individual living excessively beyond their means, the IRS should not offer any repayment plan that puts you at risk of losing your current home, car, and your job. One thing to note is, at this time, the IRS does not consider credit card repayments a necessary monthly expenditure. If you are struggling with credit card debt as well, it may be useful to look at advice on how to get relief from credit card debt.

How Do I Declare My Debts Uncollectible?

If you are already working with an IRS representative to deal with your tax debt, you can ask them to help make a report on your current file that your debts are Currently Not Collectible. If you’re not working with an IRS representative already, you will have to fill out the form 433-A. The Form 433-A gives the IRS an understanding of your total incomings and outgoings, so they can decide whether or not you are eligible to have your debts declared Uncollectible.

The Form 433-A requires you to declare:

  • Personal information, like your home address, your Social Security number, and your age.
  • The details of any children or adults who depend on you.
  • Your current employment contract.
  • Any other income you receive, such as withdrawals from retirement savings or child support.
  • All of your financial information, including your bank accounts, credit accounts, and liquid assets.
  • Three months of expenses on necessities, like food, housing, and transportation.
  • All of your pre-existing tax returns.

To avoid any legal complications that may arise from making false claims in the form 433-A, you must be completely honest about your expenditure and your assets. Full disclosure of expenses and assets can be difficult for those who are not acquainted with tax law, but we at Solvable are here to help.

Will The IRS Accept My Application for Financial Hardship?

The IRS consults their in-house guidelines to decide whether repaying your tax debt will leave you in unfair economic hardship. The IRS only consider expenses to be necessary if without them, you and your family may suffer from a loss of health and welfare, and if their loss will impact upon your ability to gain or retain employment.

The IRS decides what expenses are necessary by consulting two types of guidelines: regional and national. For household and domestic items like food, cleaning materials, and clothing, the IRS deems expenses as appropriate based on their national standards. However, the IRS decides whether housing costs and bills are appropriate for regional standards. So, if you live in a state with high living costs like California, you won’t be at a greater risk of losing your home than someone from a small town in the Midwest.

Practically, this means that as long as your expenses don’t vastly exceed local or regional averages, they should be deemed appropriate by the IRS. If paying off your tax debt would leave you unable to afford these normal expenses, your tax debt should be deemed Uncollectible. If you’ve felt that your current debts will never be conquered, now you know there is the option to register your tax debt as Uncollectible — it might just be the key to a new lease of life!

Learn more about the reputable companies we recommend who can help free you from the burden of tax debt.