How the IRS Legally Defines Economic Hardship

Everyone who owes the IRS money is under stress. That is not the same thing as economic hardship in the legal sense. The IRS uses a specific definition, and if you understand it, you can build your case around it instead of hoping a collector feels sorry for you.

The definition, word for word

The controlling language is in Treasury Regulation 301.6343-1(b)(4), the regulation that implements the levy release rules of IRC 6343. It says a levy creates an economic hardship "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."

The Financial Analysis Handbook, IRM 5.15.1.2, repeats the same idea: "Economic hardship occurs when a taxpayer is unable to pay reasonable basic living expenses." And IRM 5.16.1.2.9 uses it as the test for hardship CNC: "A hardship exists if a taxpayer is unable to pay reasonable basic living expenses."

Three pieces of that sentence matter. It is about an individual. It is about reasonable expenses. And it is about basic living expenses. Each one does work.

Individuals only

The regulation speaks of "an individual taxpayer." The hardship release condition does not protect a corporation's cash flow. That is why hardship CNC closing codes are limited to individuals, sole proprietors, general partners who are personally liable, and single-owner LLCs where the individual is the liable taxpayer. A business owner may still qualify personally, but the analysis runs through the human being, not the entity.

The factors the IRS must consider

This is the part I wish more taxpayers knew about. The regulation does not leave "reasonable basic living expenses" to an employee's gut. It lists factors. Under 301.6343-1(b)(4)(ii), the IRS "will consider any information provided by the taxpayer including":

• The taxpayer's age, employment status and history, ability to earn, number of dependents, and status as a dependent of someone else.
• The amount reasonably necessary for food, clothing, housing (including utilities, homeowner insurance, homeowner dues, and the like), medical expenses (including health insurance), transportation, current tax payments (federal, state, and local), alimony, child support or other court-ordered payments, and expenses necessary to produce income, such as union or professional dues or child care that allows the taxpayer to work.
• The cost of living in the geographic area where the taxpayer lives.
• The amount of property exempt from levy that is available to pay the taxpayer's expenses.
• Any extraordinary circumstances such as special education expenses, a medical catastrophe, or a natural disaster.
• Any other factor the taxpayer claims bears on economic hardship and brings to the IRS's attention.

Read that last item again. You are allowed to raise anything that bears on hardship. The IRS is required to consider it. That does not mean the IRS has to agree, but it cannot refuse to look.

What does not count

The same regulation draws a line: "Unique circumstances, however, do not include the maintenance of an affluent or luxurious standard of living." IRM 5.15.1.2 repeats that sentence word for word.

So a mortgage on a home far above the local housing standard, a pair of luxury car payments, or private school tuition will not get you to hardship by themselves. The IRS will measure those expenses against its standards and allow the lower number unless you can show the higher one is necessary. I explain how that works in expenses above the IRS standards.

The good faith requirement

There is a second condition people overlook. Under 301.6343-1(b)(4)(iii), the taxpayer "must act in good faith." The regulation gives examples of failing that test: "falsifying financial information, inflating actual expenses or costs, or failing to make full disclosure of assets."

I tell clients the same thing every time. Do not hide the boat. Do not leave off the bank account your sister also uses. A hardship claim built on an incomplete Form 433-A is not a hardship claim. It is a problem waiting to be discovered, and the signature line on the form is made under penalties of perjury.

How the standards fit the definition

The regulation talks about "reasonable" expenses but does not set dollar amounts. The IRS fills that gap with the Collection Financial Standards, which IRM 5.15.1 calls the Allowable Living Expense standards. They include National Standards for food, clothing and other items and for out-of-pocket health care, and Local Standards for housing and utilities and for transportation.

The handbook is clear that these are guidelines. IRM 5.15.1.2 says that "in some cases, based on a taxpayer's individual facts and circumstances, it will be appropriate to deviate from the standard amount when failure to do so will cause the taxpayer economic hardship." The taxpayer has to provide reasonable substantiation for anything above the standard.

That is the bridge between the regulation and the numbers. The standards are where the analysis starts. The regulation's factors are how you argue for something different when the standards do not fit your life.

Where the definition shows up

The same hardship test drives several different decisions:

• Levy release. IRC 6343(a)(1)(D) requires release of a levy when the IRS determines it "is creating an economic hardship due to the financial condition of the taxpayer." See levy release for economic hardship.
• CNC status. Hardship CNC under IRM 5.16.1.2.9 uses the same "unable to pay reasonable basic living expenses" standard.
• Disagreements. IRM 5.15.1.2 says that when a collection employee and a taxpayer disagree about an economic hardship determination, the taxpayer should be referred to the Taxpayer Advocate Service.

A word about exempt property

One factor in the regulation surprises people: "The amount of property exempt from levy which is available to pay the taxpayer's expenses." Certain property is exempt from levy under IRC 6334, and the regulation tells the IRS to consider how much of it is available to cover your living costs.

That cuts both ways. Exempt income that actually pays your bills is part of the picture, and the Financial Analysis Handbook says in IRM 5.15.1.12 that generally all household income, "including income that is exempt from tax on the Form 1040," is used to determine ability to pay. Do not leave a benefit off the form because you assume it does not count. List it, and then show where every dollar of it goes.

Hardship is a snapshot, not a verdict

The test is applied to your financial condition at the time of the review. It does not decide your future. A taxpayer who qualifies today may not qualify in two years, and a taxpayer who was turned down last year may qualify now after a layoff or a diagnosis. The IRS knows this, which is why hardship CNC accounts are monitored and can be reactivated when income rises.

The practical takeaway is to time your request with care. File it when your circumstances are documented and stable enough to prove, and update the IRS promptly if something material changes. A hardship determination that rests on stale facts is easy to attack and hard to defend.

Building a hardship case around the regulation

When I prepare a hardship request, I organize it around the factors in the regulation, not around the IRS form alone. The form captures numbers. The regulation captures context. Age, health, a job market that does not exist in your county, a disabled child, a hurricane that took the roof off your house: those belong in the file, documented.

A short cover letter that walks the employee through the factors, with proof attached, does more than a stack of unexplained bank statements. Collection employees work high-volume inventories. Make it easy for them to say yes.

Hardship is a legal standard with a regulation behind it. Treat it that way, and you stop asking for mercy and start presenting a case.