What Form Do You Use to File Hardship for Taxes Owed?
By: Nehemiah Jefferson, Esq., LL.M.
The Internal Revenue Service (“IRS”), as well as States, provides several options for taxpayers who experience financial hardship to pay their debts. The necessary form to complete as well as the definition of “a hardship” depends on the type of relief sought.
The term “economic hardship” was defined in the case of Vinatieri v. Commissioner. In this case, the court ruled that the IRS was wrong by attempting to levy on a taxpayer stating the levy must be released “if satisfaction of the levy in whole or in part will cause an individual taxpayer to be unable to pay his or her reasonable basic living expenses.”
On the other hand, the term “undue hardship” is defined “more than an inconvenience” in the instructions for an Application for Extension of Time for Payment of Tax Due to Undue Hardship (Form 1127). The IRS further opines, “you must show you will have a substantial financial loss” by paying the tax on the date it is due.
Forms and Remedies
The primary form used by taxpayers to provide relief for financial hardship is the Offer in Compromise or OIC (Form 656).
Some of the Federal Tax forms that may be used include: Application for Extension of Time for Payment of Tax Due to Undue Hardship (Form 1127); Claim for Refund and Request for Abatement (Form 843); Installment Agreement Request (Form 9465); Request for Innocent Spouse Relief (Form 8857); and Injured Spouse Allocation (Form 8379). However, if the ultimate goal is to settle, significantly reduce or possibly eliminate your tax debts, the form to complete is the Offer in Compromise (Form 656).
“The OIC is an agreement between the taxpayer and the IRS to settle a tax debt for less than the full amount owed. The offer program provides eligible taxpayers with a path toward paying off their debt and getting a ‘fresh start.'” The IRS may consider settling a tax debt owed if there is doubt as to whether they will be able to collect, doubt as to whether the tax debt is really owed, or an economic hardship or special circumstance warranting “promoting effective tax administration.”
How to Apply
Before attempting to complete any of the necessary documentation, you should gather all information about your financial situation, “including cash, investments, available credit, assets, income, and debt.” Instructions for completing the very detailed OIC process can be located in Form 656B.
The overall application process involves “filing out Form 433-A (OIC), Collection Information Statement for Wage Earners and Self Employed Individuals and/or Form 433-B (OIC), Collection Information Statement for Businesses, filing out a Form 656 (Offer in Compromise), attaching an initial payment, and a $205 application fee for each offer submitted.” If, however, a taxpayer meets the Low Income Certification guidelines, the application fee and initial payment will not be required.
If your OIC is accepted, payment terms include lump sum cash, short-term periodic payment, and deferred periodic payment. The overall process could easily take up to 12 months or more.
Get Help
Taxpayers who need assistance in completing these forms may contact the Taxpayer Advocate Service of the IRS by filing Form 911 or calling 877-777-4778. Similarly, states have these Advocate offices as well. The goal of the Taxpayer Advocate offices is to assist individuals and small businesses in resolving tax problems while assuring the Taxpayer’s rights are upheld. Alternatively, you may also hire an attorney who specializes in tax matters, a CPA, or an Enrolled Agent.
State Forms
Although the Federal forms were referenced, each State has similar corresponding forms. The Federal forms may be accessed on the website of the IRS (irs.gov). Most state forms can be found on the respective State Department of Revenue website.
References
133 T.C. No. 16
www.irs.gov/pub/irs-pdf/p2104c.pdf
Sec. 301.6343-1(b) (4), Proced. & Admin. Regs.
Nehemiah Jefferson, Esq., LL.M., is Principal of Esquire Tax Firm PLLC. The firm practice areas include Civil and Criminal Tax Representation, Estate Planning, Probate, and Business Planning. He earned his Bachelor’s degree from The Florida State University, his Juris Doctor from John Marshall Law School (Atlanta), and LL.M. in Taxation from the University of Alabama. Attorney Jefferson is licensed to practice law in the State of Florida, Texas, The District of Columbia, and is a member of the United States Tax Court Bar. He may be reached at www.esqtaxfirm.com.
