How do I prove a financial hardship in regard to paying federal taxes?

People who are struggling to make ends meet may be able to prove a financial hardship in order to lessen the amount of federal taxes owed.

When it comes to paying federal tax liability, people in Washington have a number of options. There is, of course, the opportunity to pay the amount due in full, using a check or even a credit card. However, the Internal Revenue Service also permits some taxpayers to set up a payment plan. According to the IRS, people who owe $50,000 or less may apply for this option.

But what if you are already struggling to make ends meet and are then slammed with a large tax bill? Fortunately, there is an option that enables you to demonstrate that you have an extraordinary hardship, which could result in a settlement offer. Here is how that works:

Defining "hardship"

To address overwhelming tax liability, consumers must prove that paying the tax liability would create an economic hardship. Fortunately, the IRS handles these matters on a case-by-case basis instead of trying to apply one formula for everyone.

Therefore, the IRS may look at how collecting the debt someone owes adversely affects factors such as the following:

  • Being able to provide food and pay the mortgage
  • Being able to pay utilities
  • Being able to obtain medical treatments or medications

The organization also takes into account someone's income, assets and debts when evaluating whether or not paying the liability would create an economic hardship. The IRS may then determine that someone is "uncollectible," and the tax liability could be temporarily waived for several years.

Reaching a settlement

Once the "uncollectible" hardship is lifted, the taxpayer essentially returns to the first step: finding a way to pay the bill. Aside from paying the full amount or getting on a payment plan, there is the alternative of an offer in compromise. This is a settlement offer that enables the taxpayer to pay less than the full liability. There are several requirements that may come into play here. For example, people currently in a bankruptcy proceeding are not eligible. Additionally, the taxpayer must be up-to-date on all tax filings.

Even an offer in compromise comes with several options for settling the debt. The first option is to give the IRS 20 percent of what is owed at the time of the application, then paying the rest of the balance in five or fewer installments. The other is to make monthly installments starting with a payment at the time of application and continuing as the IRS is considering the offer.

The IRS is willing to work with people, but it is imperative to know the possible recourses available and play by the rules. Doing otherwise could land a taxpayer in hot water. People who have questions about this issue should speak with a tax attorney in Washington.