If you cannot pay delinquent taxes because of an economic hardship, the IRS can suspend collection. This is referred to as Currently Not Collectible. Your debt is not forgiven; just that the IRS will defer collection and not garnish your wages.
The IRS Code States:
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 is defined as preventing the taxpayer from meeting necessary living expenses. Big emphasis on Necessary. A determination must be made as to whether the levy would result in actual hardship and not just an 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.
The IRS refers to this as a “53” case aka Currently Not Collectible.
How does the IRS determine a hardship status? You have to complete a financial disclosure, known as a 433, that shows your monthly income and living expenses and provide a valuation of your assets (home, cars, boats, trailers, IRA, 401K etc). The IRS allows national averages for items like food and clothing, housing and utilities and car expenses. No credit cards and no unsecured debt. For example, they allow $506 per month for a car. If you payment is $700 you are only allowed $506….
In essence, to be a hardship you must have very little disposable income. Disposable income is money left over after you have paid all your necessary expenses. Best to talk to a settlement officer to determine if you really are a hardship. 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. However, you cannot discharge unfiled taxes, and there is a two year waiting period so you can’t hurry up and file them.
Economic hardship does not forgive interest and penalties. In fact, it doesn’t forgive anything but can be an excellent tool to ‘run the clock’ if you are really in a hardship. The IRS has 10 years to collect the amount you owe. If you can delay collection long enough you can potentially erase the debt.
If you are a hardship case, you should also evaluate an Offer an Compromise which eliminates debt. Be careful of advice here though. Many unscrupulous companies tell you they can settle when they can’t.
A comparison between your resolution options can include a hardship status, filing bankruptcy or submitting an offer an compromise. You must look at all your options and pick the best one for your particular situation.