What If You Can't Afford To Pay Your Taxes: Obtaining a Hardship Status

If you cannot afford to set up an installment agreement to pay your taxes, some taxing agencies will allow you a temporary break in the form of a hardship deferral.

The Internal Revenue Service (IRS) can put you in Currently Non-Collectible (CNC) status if a representative verifies that you currently do not have enough income to meet your basic living expenses and have enough left over to pay the IRS. The California Franchise Tax Board (FTB) and the California Employment Development Department (EDD) have a similar status called a hardship. While the hardship process is generally straightforward with the IRS, it is more difficult to qualify for this temporary break with the FTB and may be substantially more difficult to qualify with the EDD.

If you qualify for CNC or a hardship with these agencies, you should also look into the Offer In Compromise (OIC) Program through which these agencies may settle your tax debt for less then you owe.

IRS Currently Non-Collectible Status 

The CNC program through the IRS is fairly straightforward and there are regulations available which provide an overview of the program.

The CNC status is only granted after full financial disclosure. The IRS agent will request that the taxpayer fill out a financial statement such as a 433A or 433F. The agent will also request and review supporting documentation such as bank statements, pay stubs and a profit and loss statement to substantiate the financial statement.

When evaluating a taxpayer's financial status, the agent must use national and local standards. This means that certain expenses are already set and do not require proof. These include Food, Clothing and Misc, Out-of-Pocket Health Care and Vehicle Operating Costs. For example, a family of four automatically receives $1,465 for the Food Clothing and Misc expenses.

If the taxpayer's expenses are greater than or equal to his or her income, the CNC status will generally be granted by the IRS.

While a taxpayer is in CNC, penalties and interest continue to accrue and the IRS will file a lien against the taxpayer. The IRS also reserves the right to re-evaluate this status at any time.

FTB Hardship 

The process for obtaining a hardship with the FTB is similar to the CNC process with the IRS. The taxpayer is required to fill out a financial statement and submit supporting documentation. The difference is that the FTB does not have set standards. The FTB Collection Procedures Manual states that the FTB offers "payment options based on the taxpayers disclosure of their true and complete financial condition." Nevertheless, the manual goes on to say that an FTB staff member may consider IRS Financial Standards when determining a taxpayer's ability to pay.

Therefore, that same family of four is not guaranteed the $1,465 for Food Clothing and Misc since the use of the IRS standards is at the discretion of the individual staff member. It is possible that this family will be placed on CNC with the IRS but will not qualify for a hardship with the FTB.

Furthermore, like the IRS, the FTB's Collection Procedures Manual discusses the financial hardship.

EDD Hardship 

Obtaining a hardship with the EDD is substantially more difficult than it is with the IRS and FTB. Even though this status does exist, there is no mention of it on the EDD website and, as I have been told by EDD employees, in EDD training manuals. In fact, I have been told by multiple EDD collections agents and their managers that no hardship status is available for taxpayers that cannot afford to pay.

This is not to say that every EDD agent will deny the existence of hardship status. Some agents that I have worked with acknowledged the existence of the hardship status and, after having my client fill out a financial statement and reviewing financial documentation, granted the status.

If you are unlucky enough to be assigned to a collections agent who refuses to acknowledge the existence of a financial hardship even though you have no ability to pay through an installment agreement, contact the EDD Taxpayer Advocate Office. The taxpayer advocates are there to protect your rights and will assist you in obtaining a hardship.

If you cannot afford to pay your liability with any of the taxing agents mentioned above, evaluate your financial status to see if you qualify for a hardship. The hardship is available to protect taxpayers from unexpected wage garnishments and bank levies. Don't leave yourself open to involuntary collection.

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.