An economic difficulty occurs when we determine that the tax prevents you from covering basic and reasonable living expenses. For the IRS to determine if a garnishment is causing difficulties, the IRS will generally need you to provide financial information, so be prepared to provide it when you call. The IRS's difficulties are for taxpayers who can't pay their back taxes. The technical term used by the IRS is Currently Uncollectible State.
An agreement with the IRS (sometimes called a compromise offer) is sometimes a better option than the difficulties of the IRS. If you've been working with an IRS representative, you can ask the IRS to mark “status 53” on your file or apply for current non-collectible status. While you're in a difficult situation for the IRS, you'll be protected against IRS collection methods, such as the seizure of assets, the garnishment of your paycheck, or the withdrawal of money directly from your bank account. As noted, although the IRS will temporarily suspend CNC's collection methods in situations of financial difficulty, sanctions will continue to apply and IRS regulations on economic hardship impose the final refund of outstanding taxes through alternative payment plans.
If you expect to owe new taxes this year and your back taxes are struggling with the IRS, the new taxes will not automatically be included in the IRS distress statement. The IRS financial hardship program is designed to help taxpayers who would not be able to cover their necessary living expenses if they were required to pay their tax bills. Many taxpayers are unaware of the IRS procedures for difficult situations introduced by the IRS hardship program and the opportunities it creates for people experiencing tax difficulties. Consider the difficulties of the IRS if you can't pay your back taxes and don't qualify for an IRS agreement.
Because your financial situation directly affects your eligibility for IRS distress, if your income decreases due to one of the following situations, this could affect your ability to receive distress status from the IRS. If, for example, you don't qualify for an IRS settlement because of a major asset, such as real estate or a retirement fund, you may qualify for IRS distress status. These are much easier to qualify than the IRS hardship program and require much less personal disclosure. IRS rules on financial hardship can apply to an account for up to 10 years, which is generally the time the IRS has to collect back taxes before the statute of limitations is enforced.
If you have extra money to make a small payment, the IRS recommends that you make the payments while you are in a difficult situation for the IRS. Because the IRS hardship program requires the disclosure of highly sensitive financial records, some taxpayers are tired of filing a collection information return and instead opt for an online payment agreement. If your income has increased, the IRS may remove you from IRS distress because it believes you are better able to support yourself and pay your taxes.