IRS Hardship Status: How to Qualify, Avoid Mistakes, and Get Tax Relief

What is IRS hardship status (currently not collectible), and how does it provide tax relief?

Juda explains that the IRS hardship program (also called “currently not collectible” status) offers temporary protection for taxpayers who can’t pay their IRS debt. While collections stop (no levies or garnishments), interest and penalties still accrue. This status helps individuals and businesses in financial distress avoid aggressive enforcement while buying time under the IRS’s 10-year statute of limitations.

How long can someone stay in IRS hardship status?

Juda notes that while the IRS usually reviews hardship cases every two years, many clients remain in this status for several years. In some cases, the IRS debt expires before the taxpayer’s finances improve, effectively eliminating the liability under the statute of limitations.

What life events commonly lead people to qualify for IRS hardship status?

According to Juda, top triggers include job loss, disability, severe illness, income reduction, or major increases in cost of living. Business owners may qualify if they lose key contracts or experience a sudden downturn. Fixed-income individuals are also common candidates for IRS hardship status.

How does a tax attorney determine if hardship status is the right option?

Juda starts by filing a power of attorney, reviewing the client’s tax records, and checking compliance. He also analyzes the remaining collection time (CSED) and evaluates income, assets, and IRS-allowable expenses to decide if “currently not collectible” status is appropriate, or if another IRS resolution, like an offer in compromise or installment plan, would be better.

What factors does the IRS scrutinize in hardship applications?

The IRS primarily focuses on financial statements and assets. Juda emphasizes that even if someone owns property or has income, they may still qualify if the asset can’t reasonably be liquidated or is used for necessary living arrangements. Health-related financial hardship can also play a significant role.

What are the biggest myths about IRS hardship status?

Juda warns against two major misconceptions:

• That hardship status erases tax debt (it doesn’t, the balance continues growing).
• That once approved, you’ll never hear from the IRS again. In truth, the IRS monitors future tax returns to see if income improves and may reevaluate your status at any time.

Can you be denied hardship status, even if you’re struggling?

Yes. Juda often sees clients misled by ads promising “settle your tax debt for pennies on the dollar.” He clarifies that the IRS won’t grant hardship status unless the financials support it. That’s why a professional analysis is key to identifying the right path to tax relief.

What mistakes or IRS red flags can ruin a hardship application?

Common pitfalls include:

• Incomplete or inaccurate financial statements
• Failing to file all tax returns
• Unsupported expenses that exceed IRS standards
• Unreported assets, such as old bank accounts still in the taxpayer’s name.

How does the IRS determine which expenses are allowed?

The IRS uses standard expense guidelines by county and household size. Juda notes that exceeding those limits requires special justification and documentation. For example, a high housing cost may be allowed if it’s necessary and unavoidable, but only with supporting evidence.

How can taxpayers strengthen their case for IRS hardship status?

A strong application includes a fully documented financial statement, supporting bank records, pay stubs, and a narrative cover letter explaining why the client qualifies under the IRS Internal Revenue Manual. Juda builds a persuasive story for why no payments can be made—and why hardship is the best-fit resolution.

What are the long-term effects of being in IRS hardship status?

Juda outlines three lasting consequences:

• The IRS will likely file a federal tax lien on real property.
• Interest and penalties continue to grow.
• Any tax refunds will be automatically applied to the debt.

That said, hardship status can let the 10-year collection clock run out, especially for clients whose finances never recover, effectively eliminating the tax liability over time

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