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financial hardship

What Does The IRS Consider a Financial Hardship?

March 04, 2016  |   Last modified on May 18, 2021

The IRS considers a financial situation a “hardship” when a taxpayer is unable to meet their allowable living expenses. Taxpayers experiencing financial hardship may be able to obtain a reduction in tax debt or stop IRS collection actions against them.

What Are Allowable Living Expenses?

Allowable living expenses are those expenses necessary to provide for a taxpayer and/or their family’s health and welfare. The IRS has established national standards for five (5) necessary expenses that are derived from the Bureau of Labor Statistics Consumer Expenditure Survey and are defined as follows:

  • Food. This includes food items purchased at grocery and other food stores for consumption at home. Meals and snacks, including tips, purchased at restaurants (fast-food, full-service, take-out, or delivery) are also allowable.
  • Housekeeping supplies. Laundry and cleaning supplies, stationery (paper, pens, and envelopes), postage, as well as lawn and garden supplies.
  • Apparel and services. Money spent to purchase or make clothing, alterations, or repairs to clothing, as well as clothing rental and dry cleaning expenses are considered. Jewelry and watch purchases and/or repairs are also allowed.
  • Personal care products and services. This includes hair, shaving, bath, and oral health products. Electronic personal care devices/appliances and other personal care items are also considered.
  • Miscellaneous. These are necessary expenses that a taxpayer incurs that are not included in the previous four categories. Expenses that exceed the Collection Financial Standards can be claimed under miscellaneous. Examples of miscellaneous expenses include credit card payments, school supplies, and bank charges.

These Collection Financial Standards are used to determine a taxpayer’s ability to pay a delinquent tax liability. A taxpayer who cannot afford to meet any part of their allowable living expenses due to financial hardship may be able to reduce their tax debt or get more time to pay without the risk of IRS collection actions, if they qualify for the IRS hardship program.

IRS Financial Hardship Relief

Taxpayers who have a tax debt and are also experiencing financial hardship have resolution options available. An Offer in Compromise and Partial Payment Installment Agreement are examples of IRS hardship relief that allow for a reduction in the tax debt. Using a debt reduction plan, taxpayers with a hardship can obtain a permanent resolution while paying less than what they owe. The reduction amount will depend upon the total income, assets, and total debt amount.

Those who cannot afford to pay monthly installments on their tax debt may be able to halt IRS collection efforts by obtaining Currently Not Collectible (CNC) status. Taxpayers in CNC status are only required to pay their tax debt if their financial situation improves.

To see if you are eligible for IRS hardship relief, schedule a free consultation with Tax Assistance Group today!