When the taxpayer’s liability can be collected in full, but collection of the federal tax would create an economic hardship, the IRS will consider all facts before taking collection action or enforcement action such as federal tax liens or federal tax levies.
The definition of economic hardship is derived from Treasury Regulations § 301.6343-1. An Economic hardship occurs when a taxpayer is unable to pay reasonable basic living expenses.
The determination of a reasonable amount for basic living expenses will be made by the Internal Revenue Service and will vary according to the unique circumstances of every individual taxpayer.
Unique circumstances, however, do not include the maintenance of an affluent or luxurious standard of living. The IRS in accordance with the United States Departmental of Labor have set up platforms to determine these hardship and living standards.
These standards are also being used by the United States Department of Justice in the normal course of U.S. bankruptcy proceedings.Because economic hardship is defined as the inability to meet reasonable basic living expenses, it applies only to individuals (including sole proprietorship entities).
Compromise on economic hardship grounds is not available to corporations, partnerships, or other non-individual entities.
The taxpayer’s financial information and special circumstances must be examined and fully documented to determine if they qualify for an economic hardship.
Financial analysis includes reviewing basic living expenses as well as other considerations. The IRS may go back for the last 3 years, examine all canceled checks and will complete a full asset check.
They will examine credit reports and loan applications and sale of assets for the last 3 years. The IRS will also look to see if the taxpayer has placed assets beyond the IRS’ reach.
The taxpayer’s income and basic living expenses must be considered to determine if the claim for economic hardship should be accepted. Basic living expenses are those expenses that provide for health, welfare, and production of income of the taxpayer and the taxpayers family.
National and local standard expense amounts are designed to provide accuracy and consistency in determining taxpayer?s basic living expenses. These standards are guidelines and if it is determined that a standard amount is inadequate to provide for a specific taxpayers basic living expenses, allow for some change.
A check on our website can explain this more fully. The IRS will require the taxpayer to provide reasonable substantiation and document the case file. A 433-A financial statement is required by Internal Revenue Service on all these cases.
In addition to the basic living expenses, other factors to consider that have impact upon the taxpayers financial condition include:
- The taxpayers age and employment status,
- Number, age, and health of the taxpayers dependents,
- Cost of living in the area the taxpayer resides, and
- Any extraordinary circumstances such as special education expenses or natural disaster.
- Medical situations that have effected the life of the taxpayer or others in his family.
- The education of the taxpayer is sometimes considered as well.
- This list is not all-inclusive. Other factors may be considered in making an economic hardship determination.