Filing for financial hardship with the IRS is a serious decision that can provide immediate relief when you are unable to pay your tax debt. The IRS recognizes that some taxpayers face genuine economic distress, and the Offer in Compromise program, along with other options, is designed to help in these specific situations. Understanding the exact criteria and the application process is the first step toward resolving your tax liability without incurring further penalties.
Understanding What Financial Hardship Means to the IRS
The IRS defines financial hardship more narrowly than general financial difficulty. To qualify, you must prove that paying your tax debt would prevent you from meeting basic living expenses. This is not simply about having a tight budget; it is about demonstrating that you cannot pay for essentials like food, clothing, housing, and medical care. The agency looks at your income, assets, and monthly expenses to determine if you meet this strict definition.
Evaluating Your Eligibility for Relief Options
Before submitting a formal application, you should evaluate which relief option aligns with your situation. The primary path for those experiencing true financial distress is the Offer in Compromise. This program allows you to settle your tax debt for less than the full amount you owe. You are generally eligible if you can prove that full payment would create an economic hardship or that your financial position is static and unlikely to improve.
Key Criteria the IRS Considers
Your income and ability to pay.
Your asset equity and net worth.
Your monthly living expenses.
The timing and feasibility of asset liquidation.
Whether paying the full amount would prevent you from maintaining basic living standards.
Step-by-Step Application Process
Applying for financial hardship requires careful preparation and thorough documentation. You must complete the official Form 656 for an Offer in Compromise and include detailed financial information. This includes submitting recent tax returns, proof of income such as pay stubs, and detailed records of your monthly expenses. The accuracy of this documentation is critical, as incomplete applications are often rejected.
Document Type | Purpose
Form 656 | Official application for an Offer in Compromise
Financial Statement | Details your income, assets, and liabilities
Proof of Income | Pay stubs, tax returns, and W-2s
Expense Verification | Receipts and statements for housing, food, and medical costs
Alternative Relief If You Do Not Qualify for an OIC
If the Offer in Compromise is not approved, there are other mechanisms to manage your payments. You can request a Currently Not Collectible status, which pauses collection efforts because you lack the funds to pay. While the tax debt remains, the IRS will stop wage garnishments and levies. Additionally, an Installment Agreement allows you to pay the full amount over time, which can prevent severe collection actions even if it does not reduce the total debt.
Avoiding Common Mistakes During the Process
One of the most common errors is failing to file all required tax returns before applying for relief. The IRS will not review your hardship application if you have missing returns. Another mistake is submitting vague information; you must provide specific numbers and verifiable proof. Finally, ignoring notices or failing to respond promptly can result in the loss of your opportunity for relief, so consistent communication is essential.
