When the IRS’s Collection Efforts Create an Economic Hardship

The IRS has broad collection powers that it can bring to bear to collect unpaid taxes. Even though it has these powers, it often chooses not to use them. This is especially true in cases where the collection actions would result in an economic hardship for the taxpayer.

What is an Economic Hardship?

The term “economic hardship” is defined by when it occurs. It occurs if the IRS collection action results in the taxpayer not being able to pay his or her “reasonable basic living expenses.” The only guidance that addresses this merely says that this standard does not include maintaining an affluent or luxurious standard of living.

What Factors Establish that an Economic Hardship Exists?

Given the absence of a clear definition, individual IRS revenue officers are able to use their discretion to determine whether the facts show that this standard is met. They do so by considering the following factors:

  1. The taxpayer’s age, employment status and history, ability to earn, number of dependents, and status as a dependent of someone else;
  2. The amount reasonably necessary for food, clothing, housing (including utilities, homeowner insurance, home-owner dues, and the like), medical expenses (including health insurance), transportation, current tax payments (including federal, state, and local), alimony, child support, or other court-ordered payments, and expenses necessary to the taxpayer’s production of income (such as dues for a trade union or professional organization, or child care payments which allow the taxpayer to be gainfully employed);
  3. The cost of living in the geographic area in which the taxpayer resides;
  4. The amount of property exempt from levy which is available to pay the taxpayer’s expenses;
  5. Any extraordinary circumstances such as special education expenses, a medical catastrophe, or natural disaster; and
  6. Any other factor that the taxpayer claims bears on economic hardship and brings to the attention of the director.

Why is This Important?

It is usually up to individual taxpayers to put the IRS on notice that there is an economic hardship and provide the IRS with information that shows that this condition exists. When this happens, the IRS is required to stop certain collection actions if there is an economic hardship. This includes lifting a levy, for example. This can mean the difference between being able to provide food and shelter for the taxpayer and his or her family.

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