The Economic Hardship Factor: How the IRS Measures Whether Paying Would Break You

In an equitable relief case, the IRS asks a blunt question: if we make you pay this, can you still keep the lights on? That is the economic hardship factor. It is one of the three elements of streamlined relief, and it is one of the factors that can only help you. If you would suffer hardship, it weighs in favor of relief. If you would not, it is neutral. It never counts against you.

That makes it worth getting right.

Where the factor comes from

Internal Revenue Code section 6015(f) authorizes equitable relief when it would be inequitable to hold you liable, considering all the facts and circumstances. Revenue Procedure 2013-34 lays out how the IRS applies that standard. Economic hardship appears in two places:

• Section 4.02(2), as one of the three elements for a streamlined determination, along with being no longer married and lacking knowledge or reason to know.
• Section 4.03(2)(b), as one of the factors weighed when streamlined relief is not available.

The definition is the same in both places.

The definition

Under section 4.03(2)(b), economic hardship exists if satisfying the tax liability, in whole or in part, will cause you to be unable to pay reasonable basic living expenses. Whether you will suffer hardship is determined based on rules similar to those in Treasury Regulation 301.6343-1(b)(4), and the IRS considers your current income and expenses and your assets.

That regulation is the one the IRS uses to decide whether a levy must be released for economic hardship. It lists what goes into reasonable basic living expenses, including:

• Your age, employment status and history, ability to earn, number of dependents, and whether you are someone else's dependent.
• The amount reasonably necessary for food, clothing, housing (including utilities, homeowner insurance and dues), medical expenses (including health insurance), transportation, current tax payments, alimony, child support or other court-ordered payments, and expenses necessary to produce income, such as union dues or child care that lets you work.
• The cost of living where you live.
• Any extraordinary circumstances, such as special education expenses, a medical catastrophe or a natural disaster.

It also says that unique circumstances do not include maintaining an affluent or luxurious standard of living. The IRS is measuring basic needs, not your old lifestyle.

The 250 percent test

Revenue Procedure 2013-34 gives the IRS a specific framework built on the federal poverty guidelines published by the Department of Health and Human Services. The IRS compares your income to the guideline for your family size and also looks at how much your monthly income exceeds your reasonable basic monthly living expenses.

The rules work like this:

1. Income below 250 percent of the poverty guideline. The factor weighs in favor of relief, unless you have assets you could use to pay toward the tax and still adequately meet your reasonable basic living expenses.
2. Income above 250 percent, but monthly income exceeds monthly expenses by $300 or less. The factor still weighs in favor of relief, with the same exception for assets.
3. Income above 250 percent and more than $300 left over each month, or either of the first two tests met but you have sufficient assets. The IRS considers all the facts and circumstances, including the size of your household, to decide whether you would suffer hardship.

The poverty guidelines change every year, so the dollar figure behind the 250 percent line depends on the year and your household size. Check the current HHS guidelines for your family size when you prepare your request. The $300 figure is written into the revenue procedure itself.

Shared expenses and a new spouse

One rule catches remarried people off guard. Section 4.03(2)(b) says that in determining your reasonable basic living expenses, the IRS will consider whether you share expenses or have expenses paid by another individual, such as a family member, including a current spouse.

So if you remarried and your new spouse pays the mortgage, the IRS will factor that in. Your income alone may look low, but if your household expenses are being covered by someone else, the hardship picture changes. Be accurate about this on Form 8857. The IRS will ask.

Assets matter

The asset exception appears in each test. If you have assets out of which you can make payments toward the tax and still meet your basic living expenses, the factor may not favor relief even if your income is low.

What counts? The revenue procedure does not list specific asset types, but it is talking about resources that could realistically be used: savings, investment accounts, equity in property. Be prepared to explain any asset that is not truly available, such as retirement funds you cannot reach without penalty, or property that is tied up in the divorce.

When the factor is neutral

The factor is neutral, not negative, if denying relief would not cause economic hardship. Section 4.03(2)(b) also says that if the requesting spouse is deceased, the factor is neutral.

Neutral is not fatal. Equitable relief cases are won on the overall balance. You can lose this factor and still win on knowledge, legal obligation, significant benefit, compliance and health. But you cannot get streamlined relief under section 4.02 without it.

How to present hardship

Form 8857 asks about your current income, expenses and assets. Treat those questions seriously. In my experience, the hardship factor is often decided by what the requesting spouse puts on that form and attaches to it. Useful support includes:

• Recent pay stubs or proof of other income, including child support and alimony received.
• A monthly budget showing housing, utilities, food, transportation, insurance, medical costs, child care and court-ordered payments.
• Bank statements that match the budget.
• Documentation of any extraordinary expense: medical bills, special education costs, disaster losses.
• An explanation of who else, if anyone, contributes to household expenses.
• Statements for any asset, with an explanation of whether it is actually available.

Accuracy matters in both directions. Treasury Regulation 301.6343-1(b)(4)(iii) says, in the levy context, that falsifying financial information, inflating expenses or failing to disclose assets is a failure to act in good faith. The IRS will compare what you say against what it can see in its own records, including information returns.

Timing: hardship is measured now

The hardship factor looks at your situation at the time of the determination, not at the time the return was filed. That cuts both ways. If you are struggling today, it helps. If your finances improve during a long review, the picture may change. If your situation changes materially while your request is pending, consider updating the IRS.

Hardship and collection are different questions

Do not confuse the hardship factor in an innocent spouse case with the IRS's general collection hardship procedures. A finding that you would suffer hardship in an equitable relief case helps relieve you of the liability itself. Collection alternatives only manage how a liability you still owe gets paid. If you qualify for relief, you want relief, not a payment plan. While your request is pending, section 6015(e)(1)(B) generally bars levy on the covered liability anyway.

A simple worked illustration

Here is how the framework plays out, using round numbers for illustration only. Suppose a divorced requesting spouse supports herself and two children. Her household income is above 250 percent of the poverty guideline for a family of three, so the first test does not apply. Her monthly income is $5,200 and her documented reasonable basic monthly living expenses are $5,000. The difference is $200, which is $300 or less, so the factor weighs in favor of relief unless she has assets that could pay the tax while still covering basic expenses.

Change one fact. If her expenses were $4,700, the difference would be $500. Now the IRS looks at all the facts and circumstances, including household size, to decide whether she would suffer hardship. The factor might still favor her, but it is no longer automatic. That $300 line is why an accurate, complete expense list matters so much.