What Is the IRS Hardship Program?

What is CNC status?

The IRS hardship program is for people who are struggling financially and don't have the money to pay their tax bills. Taxpayers must meet certain requirements to be considered. You need to show that you have little or no money left after paying living expenses, such as rent, groceries and utilities.

However, if the IRS grants you CNC status, the debt doesn't disappear. You'll still owe the money when your financial situation improves, along with interest and late penalties.

Who qualifies for a CNC?

Taxpayers experiencing financial hardship and struggling to pay essential living expenses can apply for the IRS hardship program. But the IRS sets amounts for basic living expenses, and it’s possible that your basic living expenses cost more than what the IRS considers standard.

According to Logan Allec, founder of Choice Tax Relief, "If the IRS determines that the standard housing expense for your county and family size is only $2,000 per month, but you pay $3,000 per month in housing expenses, the IRS will generally only let you consider $2,000 of housing expenses in proving to them your hardship case."

» MORE: Best tax software and services

How to apply for the IRS hardship program

Applying for CNC status is typically done by calling the IRS. You'll have to provide income and expense information and documentation. Here’s what you’ll need:

• Personal asset information with documentation: This includes information for all bank accounts, investments, credit cards and property, including real estate and vehicles.
• All of your income: Provide information about your wages, interests and dividends.
• Monthly essential living expenses: These include your rent or mortgage, utilities, food, clothing, vehicle costs, public transportation and health insurance.
• Form 433-A, Form 433-B or Form 433-F: These forms are known as Collection Information Statements and are used to determine how you can satisfy an outstanding tax liability.

Comparing the IRS hardship program to other tax relief options

If you can’t pay your tax debt right away but may not qualify for CNC status, another option might be a better fit for your situation.

Offer in compromise

An offer in compromise, or OIC, is an agreement between the IRS and the taxpayer that settles the taxpayer’s tax liability for less than the amount actually owed. The IRS might agree to your OIC request if there’s doubt about your tax liability or its collectibility. Doubt as to collectibility exists whenever the taxpayer’s income and assets are less than the full amount of their tax liability.

Installment agreements

You may be eligible to pay your tax debt over time with an installment agreement, or payment plan. The IRS offers short- and long-term payment plan options for taxpayers who need months or years to pay their tax debt, rather than being able to pay it immediately when they file their income tax returns.

What happens after you're granted the IRS hardship program?

If you’re granted CNC status, the IRS can’t try to collect from you while you’re in the hardship program. But interest and penalties continue to accrue.

IRS collections actions paused

The IRS temporarily suspends taxes owed when it grants a taxpayer CNC status. "The IRS will stop any forced collection activity against you as long as you remain in hardship status," said Allec. "This means that the IRS is not allowed to levy your wages or garnish your bank account."

Interest, penalties and tax refunds

Because CNC status is temporary and doesn’t erase your tax debt, interest accumulates on the money you owe until you’ve paid it in full. You’re also responsible for paying any associated penalties.

While you have CNC status, the IRS can take any refunds you might otherwise be owed during and apply that money toward your unpaid tax debt.

How to maintain your status for the IRS hardship program

Once CNC status is granted, it's important that you continue to comply with all tax laws.

As a government agency, the IRS wants to protect itself by ensuring it gets paid the money it’s owed. The IRS can file a Notice of Federal Tax Lien (NFTL), a claim against assets that will appear in public records.

"If you get into hardship status, then the IRS files a Notice of Federal Tax Lien, and then you sell your home that has hundreds of thousands of dollars in equity in it, the IRS will get ‘first dibs’ on your proceeds (up to the lien amount). You get the rest," Allec explained. Typically, the IRS places a tax lien when the balance owed is $10,000 or more.

The IRS will check your financial situation annually to see if it has improved and you're able to pay the taxes you owe. If the IRS has questions or needs additional documentation, be sure to respond quickly and provide the requested information.

The IRS can try to collect taxes for up to 10 years from the date they were assessed. However, the agency can suspend this period in some situations, extending the time it has to collect.

» MORE: What is a tax lien?

Bottom line

If you’re struggling to afford basic living expenses and don't have money to pay your tax debts, the IRS hardship program is a potential option. However, keep in mind that the IRS sets its own rates of what the cost of living is, and that people granted hardship status still owe taxes. The IRS will apply interest and penalties while the tax debt is on a temporary hold.