What Constitutes a Financial Hardship for the IRS?

The Internal Revenue Service (IRS) recognizes that financial hardships can occur, and may adjust its collection actions accordingly. A financial hardship, in the context of IRS collections, refers to a situation where an individual is unable to pay their tax debt or can only do so with extreme difficulty while still meeting their basic living expenses.

How the IRS Determines Financial Hardship

To determine if a taxpayer is experiencing a financial hardship, the IRS will typically request financial information, such as:

  • Income and expenses
  • Assets and liabilities
  • Monthly living expenses

The IRS will then compare the taxpayer’s financial situation to its collection financial standards to determine if the taxpayer’s basic living expenses exceed their income. If so, the IRS may consider the taxpayer to be experiencing a financial hardship.

Allowable Basic Living Expenses

The IRS defines basic living expenses as those necessary for the taxpayer and their dependents to maintain a minimal standard of living. These expenses may include:

  • Housing (rent or mortgage, utilities)
  • Food
  • Clothing
  • Transportation
  • Healthcare
  • Education

Options for Taxpayers Facing Hardship

If the IRS determines that a taxpayer is experiencing a financial hardship, it may offer various options to help them resolve their tax debt, such as:

  • Installment agreement: Allows the taxpayer to pay their debt over a period of time in monthly installments.
  • Offer in compromise: Allows the taxpayer to settle their debt for less than the full amount owed.
  • Temporary delay of collection: Suspends collection activities for a specified period.

Contacting the IRS

Taxpayers who believe they are experiencing a financial hardship should contact the IRS immediately to discuss their situation. The IRS may be able to provide guidance and assistance in resolving the tax debt.

Additional Information

IRS Hardship Program Explained


What qualifies as financial hardship?

You are in financial hardship if you have difficulty paying your bills and repayments on your loans and debts when they are due. Under credit law you have rights when you are in financial hardship .

How do I qualify for an IRS hardship?

Generally speaking, IRS hardship rules require: An annual income less than $84,000 per year. Little or no funds left over after paying for basic living expenses. Basic living expenses fall within the IRS guidelines.

What is a qualifying hardship?

Reasons for a 401(k) Hardship Withdrawal According to the IRS, the following as situations might qualify for a 401(k) hardship withdrawal: Certain medical expenses. Burial or funeral costs. Costs related to purchasing a principal residence. College tuition and education fees for the next 12 months.

Does a retirement plan allow hardship distributions?

“A retirement plan may, but is not required to, provide for hardship distributions,” the IRS states. If the plan does allow such distributions, it must specify the criteria that define a hardship, such as paying for medical or funeral expenses. Your employer will ask for certain information and possibly documentation of your hardship.

What is a hardship in the IRS?

Basically, in Internal Revenue Manual, which is titled simply “Hardship,” the IRS states that a hardship exists if a taxpayer is unable to pay reasonable basic living expenses. But what does that mean? Do you have to be living in a van down by the river? Do you have to be absolutely destitute?

What is financial hardship?

The IRS determines financial hardship as being when an individual cannot pay their allowable living expenses. Those who meet the requirements are eligible for reduced tax payments or a halt in debt collection.

What is a hardship distribution?

A hardship distribution is a withdrawal from a participant’s elective deferral account made because of an immediate and heavy financial need, and limited to the amount necessary to satisfy that financial need. The money is taxed to the participant and is not paid back to the borrower’s account.

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