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. However, it’s important to note that there is no single “IRS hardship program.” Instead, this is an informal term used to refer to a group of programs, including Currently Not Collectible, Offer in Compromise (OIC), and Partial Payment Installment Agreements (PPIAs).

When it comes to CNC status, 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. For example, you might apply for CNC if you’ve experienced a recent job loss, have high medical bills or live on a fixed income.

If you meet qualification criteria, the IRS will temporarily pause collection efforts on your debt. 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 CNC and other IRS hardship programs. But the IRS sets the amounts for allowable living expenses, and it’s possible that your basic necessities 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."

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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 to document:

• Personal assets, including bank accounts, investments and property such as real estate and vehicles
• Income, including wages or self-employment income, interests and dividends
• Living expenses such as your rent or mortgage, utilities, food, transportation and health insurance

You must also submit 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. 

Common application errors that can cause you to be denied CNC status include incomplete paperwork, overstating expenses, and understating income or assets. Your application can also be rejected if you have any unfiled returns, so make sure you’re up to date on your filing before you call the IRS. 

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 (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 your income and assets are less than the full amount of your tax liability or if collecting the full amount owed would cause severe economic hardship.

CNC is a good choice if you expect that your ability to pay taxes will eventually recover, but an OIC may better serve your needs if you think your current financial situation is likely to be permanent — for example, if you have become disabled or lost a spouse who was your household’s primary earner.

Installment agreements

You may be eligible to pay your tax debt over time with a Partial Payment 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.

If you don’t qualify for CNC or an OIC, a PPIA is a good way to get relief. Paying in installments can make it easier to discharge your tax debt over time.

Penalty relief

The IRS will sometimes reduce or remove penalties that you owe, such as fees charged for failure to file or pay your taxes. To qualify, you need to prove that you tried to comply with tax laws but weren’t able to due to circumstances beyond your control. Penalty abatement can be combined with other IRS hardship programs.

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 and apply that money toward your unpaid tax debt.

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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?

FAQ

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.