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What Does the IRS Consider a “Financial Hardship”?

The IRS considers a financial situation a ‘hardship’ when the taxpayer is not able to meet allowable living expenses. Taxpayers experiencing financial hardship may be able to obtain a reduction in tax debt or stop IRS collection actions against them.

What Are Allowable Living Expenses?

Financial HardshipAllowable living expenses are those expenses necessary to provide for a taxpayer and his/her family’s health and welfare. These national standards apply to the following five necessary expenses:

  1. 1. Food
  2. 2. Housekeeping supplies
  3. 3. Apparel and services
  4. 4. Personal care products and services
  5. 5. Miscellaneous

Food includes food at home and away from home. It also includes tips paid at fast-food outlets, take-out, delivery, and full-service restaurants.

Housekeeping supplies include supplies for cleaning, stationary, household products, garden, etc.

Apparel and services include clothing, footwear, jewelry, watches, clothing rentals, repair, clothing storage, dry cleaning, etc.

Personal care products and services include cosmetics, appliances, oral hygiene products, etc.

Miscellaneous allowances are necessary expenses that a taxpayer incurs that are not included in the previous four categories. Expenses that exceed the Collection Financial Standards can be claimed under miscellaneous. These expenses may include credit card payments, school supplies, bank charges, etc. Collection Financial Standards are used to determine a taxpayer’s ability to pay a delinquent tax liability.

A taxpayer that cannot afford to meet any part of his or her allowable living expenses due to financial hardship may qualify for either a reduction in tax debt, or get more time to pay without the risk of IRS collection actions.

National Standards

Taxpayers are allowed the total National Standards amount every month, when determining their allowable expenses. Usually, the IRS will not question these amounts if they stay within the allowable threshold. However, if the amount claimed is more than the amounts allowed, then the taxpayer will need to provide documentation to explain why the expense overage is necessary.

Expense One Person Two Persons Three Persons Four Persons
Food $315 $588 $660 $821
Housekeeping supplies $32 $66 $65 $78
Apparel & services $88 $162 $209 $244
Personal care products & services $34 $61 $64 $70
Miscellaneous $116 $215 $251 $300
Total $585 $1,092 $1,249 $1,513
More than four persons Additional Persons Amount
For each additional person, add to four-person total allowance: $378

Source: IRS. These standards are effective 03/30/2015. The standards change. Therefore, check irs.gov periodically for the latest version.

Hardship Relief for Tax Debt

Taxpayers who have a tax debt and are also experiencing a financial hardship have resolution options available. The Offer in Compromise and Partial Payment Installment Agreement are examples of IRS plans that allow for a reduction in the tax debt. Using a debt reduction plan, taxpayers with a hardship can obtain a permanent resolution while paying less than what they owe. The reduction amount will depend upon the total income, assets and the total debt amount.

Those that cannot pay even a reduced amount for a tax debt can halt IRS collection efforts by obtaining the status of Currently Not Collectible (CNC). Taxpayers in CNC status are only required to pay their tax debt if their financial condition improves.