IRS Hardship Program
It is a regular occurrence that we see clients in our accounting firm who owe taxes to the IRS that they cannot afford to pay. Sometimes it is a tax bill for one year. Frequently it is a tax bill for multiple years. Either way, the IRS offers a number of solutions that provide tax relief to taxpayers who find themselves unable to pay the government. These solutions apply to both individuals and businesses who are behind on their taxes. The solution that we are covering in this article is the IRS Hardship Program. It also called “Currently Not Collectible,” CNC or “Currently Uncollectible” status.
This article does not discuss other available tax resolution solutions, such as the ever popular Offer-in-Compromise, the Installment Agreement or Payment Plan, and Bankruptcy. Bankruptcy is done through the courts and is not an actual program offered by the IRS. These other tax resolution solutions are discussed in other articles on our website.
One key advantage of the IRS Hardship Program, or Currently Not Collectible or Uncollectible status, is that it puts a hold or stop on all IRS collection activity. This means that the IRS will stop sending you nasty letters and notices about your tax debt while you are a participant in the program. And most importantly, the IRS will not be able to levy or seize your assets, or garnish your wages, during this time.
How to Prove Hardship to the IRS
For the IRS to consider you to be not collectible, you will have to prove that you qualify for the IRS Hardship Program. You will complete and submit IRS Form 433, which serves as the IRS hardship request form. This form is used to summarize your financial situation. It uses mathematical tests to determine whether or not you meet the definition of financial hardship for tax purposes.
Form 433 requires the preparation of financial statements and the attachment of documentation and support for your numbers. It is not an easy form to complete. However, the effort to complete Form 433 is worth the reward if it can put a hold on IRS collection activity.
Form 433 determines qualification for the IRS Hardship Program, or Non-Collectible Status based on two calculations.
- First, net equity in assets is calculated. Net equity means fair market value, less debt. A common example of debt is as a mortgage or home equity loan. Assets used for this test includes your residence, automobiles and investments.
- Second, gross monthly income is calculated, less “allowable expenses.” It is important to note that the IRS has very specific guidelines about what are considered to be allowable expenses.
If these two calculations show that you do not have the funds to pay the back taxes, then the IRS will recognize your hardship and you will be deemed to be not collectible. And IRS collection activity for the taxes will come to a stop.
CPA Pointer: The IRS allows current income numbers for purposes of the first calculation. This helps your case if you have recently lost your job or had a recent decrease in earnings (such as during the COVID pandemic).
The IRS will not require you to include equity in assets in the second calculation if banks will not approve a loan against the equity. Therefore, if you cannot get a loan to pay the tax, such as a home equity loan or refinancing, the equity should be excluded from the net available equity in assets calculation on Form 433.
CPA Pointer: Apply for home equity loans at three banks. If you get rejection letters from the banks, be sure to keep copies. These letters are ideal proof to the IRS that you cannot borrow against the equity in your house to pay off your taxes.
When the application for hardship is accepted, the taxpayer will receive IRS Form 4223. This means that the case is temporarily closed because the IRS has determined that the taxpayer does not have the ability to pay the money owed to the government at this time. Nevertheless, the money is still owing and interest and penalties will continue to accrue. Making payments toward the tax bill will, of course, minimize interest and penalties.
Federal Tax Lien
Even though a taxpayer is deemed to be currently uncollectible, the IRS may still fill a Notice of Federal Tax Lien. The purpose of a federal tax lien is for the IRS to secure its interest in assets that the taxpayer owns or acquires later.
A federal tax lien will make it harder (but not impossible) to sell your property. Check out our article on Federal Tax Liens to learn about selling a house or refinancing a mortgage while under a federal tax lien.
Hardship Tax Relief: How Long Does It Last?
It is important to note that Currently Not Collectible status is temporary. The IRS will review your numbers every two years or so to see if your financial situation has changed. If the IRS determines that you are now able to pay the tax, then IRS collection activates will resume, including notices, levies and wage garnishments.
IRS Uncollectible Status and the Statute of Limitations
The 10-year IRS Statute of Limitations (also called the CESD) continues to run during the period that you are not collectible. Therefore, with careful planning, the statute of limitations may expire while you are not collectible.
And if the IRS Statute of Limitations expires while you are not collectible, the IRS will write-off your tax in full.
The tax will simply go away.
Wouldn’t that be great news?!
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Massey and Company CPA is a boutique tax and accounting firm serving individuals and small businesses in Atlanta, Chicago and throughout the country. Our services include tax return preparation, tax planning for businesses and individuals, IRS tax problem resolution, IRS audits, and small business accounting and bookkeeping.
