How Can I Prove Financial Hardship to the IRS If I Can't Pay My Taxes?

As tax season draws near, you may be concerned that you won't be able to pay your tax bill. If you're simply broke after holiday credit card bills, you have until April 15th to pay your tax bill in full once you learn how much you owe. If your financial situation is more dire than that, you have some time to explore your options and come up with the funds or a plan.

However, if your tax problems or finances are so severe that you don't think you'll be able to pay the bill ever, you may need to file for a genuine hardship plea and be declared uncollectible.

If you can't pay your taxes, don't panic. Here's what you need to do if you anticipate being unable to pay your tax bill.

First, File Your Tax Return

It sounds counterintuitive, but it’s necessary that you file your current tax return. Failing to file on time can result in additional penalties plus interest on the unpaid taxes, which will only compound your financial stress. At the very least, file your tax return on time if you can. If you don't think you'll be able to, file for an extension — but bear in mind that the extension only gives you extra time to file your tax return without penalty, it doesn't give you extra time to pay.

If you can, include partial payment with your tax return so you will pay less interest over time.

Having your latest tax return on file also helps the IRS properly determine what you owe. If you go too long without filing, they will file substitute returns on your behalf based on the information in their system, and substitute returns never claim any benefits beyond the bare minimum for the last filing status you used. This could overstate your tax bill, thus making your tax problems even worse. Explore Payment Plans and Alternatives

After you've filed your tax return, it's time to assess the following:

  • How much you owe 
  • How much you can reasonably pay now 
  • How much time you would need to pay the entire bill 
  • The options available to you
Many taxpayers find that they can't pay their tax bills once they've prepared their taxes, so the IRS has payment plans. These plans have setup fees, but they will be waived or reduced for low-income taxpayers as well as those experiencing hardships such as health problems or fleeing domestic violence. Paying your taxes with a credit card is also an option, although IRS interest is often lower than credit card interest.

You can also file an offer in compromise (OIC), which is an option to settle your back taxes if there is no hope of collecting what you owe or you don't think you were correctly taxed in the first place.

Temporarily Uncollectible (Status 53) vs. Filing for Hardship

If you have a long-term reason for being unable to pay your taxes, such as poverty or disability, there are the "soft" and "hard" options for declaring your taxes uncollectible.

"Status 53," the soft option, refers to the internal account status at the IRS. You can make your account temporarily uncollectible for 30 days by speaking to an IRS representative and telling them about your situation. If you have been medically unable to work, fled domestic violence, or have faced other extenuating circumstances, your account gets flipped to status 53 so the collection efforts will temporarily halt.

Filing for hardship is more formal and requires more legwork on your end. The IRS defines financial hardship as “unable to pay his or her reasonable basic living expenses.” If you owe more than $10,000, you will need to fill out a form detailing your assets, debts, income, and living expenses. If you are sick or disabled, you will need proof from healthcare providers or caseworkers. Employment length and sources of income are examined, so long-term unemployment or underemployment is likely to go in your favor.

As for what is considered "reasonable living expenses," this accounts for your rent or mortgage, utilities, food, transportation, and medical expenses. Debt repayment is not factored in, nor is anything that would denote a luxurious standard of living such as entertainment or health club dues. You will need to provide three months' worth of monthly bills and proof of expenses, so take extra caution to save receipts if you do not have this information easily backed up on a bank or credit card statement.

Filing for hardship is difficult, but not impossible with adequate record-keeping and knowledge of the rules. If you want to discuss your options further, contact our office for more information.

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