Can Financial Hardship Help You Settle Tax Debt?
Discussing Economic Hardship in IRS Offer in Compromise (OIC-ETA)
Having a financial hardship could help you settle an IRS tax balance due. There are rules.
More specifically:
When the IRS considers an Offer in Compromise based on Effective Tax Administration (OIC-ETA), the issue is not:
1) Whether you can fully pay the tax, or
2) Whether you owe the tax.
The issue is whether, in collecting the full balance, the IRS would create economic hardship.
What Does the IRS Consider as “Economic Hardship”?
Under IRS rules, economic hardship exists when paying your tax debt in full would prevent you from meeting your basic living expenses.
This only relates to individuals, not businesses. However, it does apply to owners of sole proprietorships and single-owner LLC businesses.)
What is Included?
Those basic living expenses include:
- Housing and utilities
- Food and clothing
- Transportation
- Health insurance and necessary medical care
- Court-ordered obligations
- Even your current tax liability
- Child and dependent care
The IRS will apply the same financial analysis as always. As directed in the Internal Revenue Manual, the IRS will review your:
- Monthly household income (from all sources)
- Allowable household living expenses
- Equity in assets
- Age and health
- Whether the financial condition is temporary or long-term, or even self-imposed
Also, the IRS’s financial analysis is objective. It is not based on emotion, sympathy, or fairness arguments. It is a numbers-driven determination.
IRS Economic Hardship, IRS Tax Attorney (Naperville, IL)
When Will the IRS Accept an OIC Based on Financial Hardship?
It is important to know that acceptance is not guaranteed. This type of relief is determined at the IRS reviewer’s discretion. Many of these offers fail when not presented properly.
Here are some examples. The IRS may accept less than the full amount owed when, even though she can fully pay the tax:
- The taxpayer is elderly and lives on a fixed income, and payment of the tax would deplete her assets to the point where (at some point) she could not meet her basic living expenses; or
- Her significant medical expenses consume current income, and other resources (like home equity) are being used to meet basic living expenses; or
- The taxpayer’s disability limits her earning ability, and liquidating assets would eliminate her ability to pay for basic care.
These are just a few examples. This list is not exhaustive.
This type of settlement falls under Offer in Compromise – Effective Tax Administration (OIC-ETA). It is different from the more common “Doubt as to Collectibility” Offer (or “OIC-DATC”) cases:
- An Offer in Compromise based on Doubt as to Collectibility (OIC-DATC) is when the IRS cannot realistically collect the full tax debt because the taxpayer’s income and assets are insufficient to pay the tax in full.
- An Offer in Compromise based on Effective Tax Administration (OIC-ETA) is when the IRS technically could collect the entire balance, but collecting it would cause the taxpayer a financial or economic hardship, particularly under exceptional circumstances.
Important: Hardship Is Not Automatic Relief
Just as was written above, an economic hardship, Offer-in-compromise:
- Is not guaranteed, and is not an entitlement
- Is not based on emotional appeal
- Does not allow someone to maintain a lavish lifestyle
- Requires full financial disclosure and precise calculation
- Requires adequate documentation of the special circumstances
Do You Qualify for Tax Relief
If paying your full IRS balance would leave you unable to maintain basic living expenses, especially due to age, illness or disability, income limitation, or permanent income reduction, you may qualify for an OIC under Effective Tax Administration.
Remember, qualification depends on financial and other factual analysis of special circumstances. Qualification does not depend on emotional elements, like sympathy.
The key is presenting it correctly.
If you believe your situation may qualify as economic hardship, the next step is a careful financial review.
To get a clear picture of your situation, schedule a confidential IRS tax settlement session to determine whether an Effective Tax Administration Offer-in-Compromise is realistic in your case.
“text”: “Possibly. The IRS evaluates home equity, income, and whether selling would create genuine hardship. Being elderly does not automatically protect a home. However, if a forced sale would cause serious harm, medical risk, or significant hardship, the IRS may consider those special circumstances before enforcing collection.”
IRS Hardship & Offer-in-Compromise FAQs
Can medical expenses help settle IRS tax debt for less?
Yes. Documented medical expenses that significantly reduce your ability to pay basic living costs may support a settlement with the IRS. Even if you technically could pay the full tax debt, you may still qualify for an Offer in Compromise based on economic hardship if paying would prevent you from covering necessary medical care or essential living expenses.
Does Social Security or a fixed income affect IRS hardship eligibility?
Yes. The IRS reviews all income sources, including Social Security, pensions, and disability income, when evaluating hardship. If your income is limited or you cannot reasonably increase your earnings, those factors may support a hardship-based settlement or collection alternative.
Do seniors automatically qualify for IRS hardship relief?
No. Age alone does not qualify a taxpayer for hardship relief. The IRS requires full financial documentation, including income, expenses, assets, debts, health condition, and ability to earn. For an Effective Tax Administration Offer in Compromise (OIC-ETA), approval depends on proven hardship or special circumstances — not age by itself.
Can the IRS force an elderly taxpayer to sell their home?
Possibly. The IRS evaluates home equity, income, and whether selling the property would create genuine hardship. Being elderly does not automatically protect your home. However, if selling would cause serious medical harm, displacement risk, or long-term hardship, the IRS may consider those special circumstances before enforcing collection. Relief is granted only if IRS hardship standards are met.