Except you have recently taken a vacation to Mars, you must have felt the Covid-19 pandemic pinch. There have been job losses, and people are feeling the heat. With the time for the tax that recently passed, many people might want to know if they can benefit from financial hardship.
What is financial hardship?
Before the IRS defines financial hardship, it examines if the person will face severe financial stress after paying. In part 5, chapter 15, section 1 of the Internal Revenue Manual, there is a section that describes Currently Not Collectible status, which provides the criteria for considering hardship.
“Collection of liability would create a hardship for the taxpayers by leaving them unable to meet necessary living expenses.”
This makes it essential to define “necessary living expenses,” based on what the IRS specifies.
The IRS guidelines have living expenses in four groups known as Collection Financial Standards:
Housing and utilities
Transportation
Out of pocket healthcare expenses
Food, daily supplies, clothing, and care products
While this category is broad, your annual income should be less than $84,000, and you should have little or nothing left in cash after paying these expenses.
Someone can enjoy the CNC status for as long as ten years – the statute of limitations for collection. It, however, comes with a clause – the penalty and interest keep accruing despite the CNC. You will not have to face any collection procedure from the IRS to settle your tax debt.
Proving Hardship with the IRS
The IRS needs you to submit the right paperwork as well as your financial information. These are:
Collection Information Statement Form 433B for qualifying businesses – corporations
Collection Information Statement Form 433A/433F for individuals or the self-employed
Income and statements of spending for the past three months.
Your most recent tax forms (copies)
Documents are revealing everything you have alongside the market worth of it.
A three-month average income and expenses on the category
Where applicable, proof of disability.
Qualification for Hardship
Uncle Sam uses particular criteria to determine the qualification of people for hardship status. If the amount of money you have is just enough to you and your household without anything to take care of your tax bills, the IRS might consider your eligibility.
They will examine your financial capacity by combining your entire allowable living expenses and remove them from your gross monthly income.
This gives your net disposable income, and the IRS will expect your tax based on this calculation.
Who can use the Currently, Not Collectible status?
Sole proprietorship
A partnership involving liable general partners
Individual or joint IMF
Large corporations cannot enjoy CNC. The idea is to support small business owners and individual taxpayers
For everyone who qualifies for the CNC status, the IRS reviews the taxpayer's info every two years to ensure you still maintain the qualification. You lose the state as soon as your income increases, and the IRS believes you can pay.
Every year, the IRS treats the tax separately. You will not automatically enjoy CNC the following year. While you might try to qualify every year, eligibility gets harder every year.
Make sure you file your taxes on time to avoid penalties even if you are not paying. You will be slammed with a pretty higher sentence for not filing compared to failure to pay. Also, paying off any new tax immediately is a good idea as It does not affect your hardship status. You, however, succeed in accumulating debts.
Payment Plans
For people that currently do not qualify for the Currently Not Collectible but still have difficulty sending in their tax when due, there are other payment plans they can be eligible for.
Many payment plans can help you pay your taxes in full for an extended timeframe. These are the requirements for installment plans:
Taxpayers with balances over $25,000 have to pay by Direct Debit.
Businesses with balances over $10,000 should pay by Direct Debit.
Only full payment of tax can stop interest and penalties.
New plans trigger a user fee.
You might not have to pay the user fee for people who qualify for a short-term payment plan. You can apply online to pay all payment plans.
