Tax Payment Hardship Extension; Form 4868, 1127

IRS Tax
Extensions

When Tax Day approaches, taxpayers may find difficulty in paying their taxes, perhaps due to a life-changing event. However, they can handle the situation by applying for an IRS hardship extension. An IRS hardship extension via Form 1127 is the only way to get more time to pay your taxes due as the regular tax extension on Form 4868 only gives you more time to file. Below, learn how to file for an extension through different steps and see the various forms required for different situations. See details on state tax extensions.

How to Apply for IRS Hardship Payment Extension

If you are facing financial hardship and owe taxes, consider following the steps below to work with the IRS to pay off your debt. Proving your financial situation to be critical is vital in being approved for the hardship extension. Read the steps below to learn when to apply, how to apply, and what forms and documentation you may need.

1. Confirm Whether or Not You Qualify for the IRS Hardship Program

For the IRS, a hardship is more than not having the finances for dining out and new clothing; financial hardship should show that a taxpayer has difficulty paying for necessary and reasonable living expenses. Taxpayers do not need to show that they are currently experiencing financial difficulty. Even showing the mere possibility of hardship can be enough for the taxpayer to get the approval for the IRS hardship program.

Since the IRS hardship program requires a manual review from an IRS officer, what applies to an accepted application may not apply to a rejected one. However, a taxpayer can look at the collection of financial standards used by the IRS and compare the numbers against their own records.

These financial standards are comprised of core monthly living expenses or allowable living expense standards based on the amount of people considered in the household or family.

Expense
1 Person
2 Persons
3 Persons
4 Persons
Food
$400
$724
$838
$955
Housekeeping
Supplies
$41
$76
$69
$79
Apparel &
Services
$92
$150
$191
$259
Personal Care Products &
Services
$42
$76
$72
$89
Miscellaneous
$148
$266
$303
$358
Totals
$723
$1,292
$1,473
$1,740

More than four persons: In addition to the four-person total allowance, add an additional $341 per additional person.

This means, for a higher chance at getting an approval for the IRS hardship program, the taxpayer should prove inability or difficulty to shell out a total of $723 per month. These values change when the taxpayer also pays for their spouse and other dependents.

Examples of the above categories can be summarized as follows:

  • Food: at home food and food away from your residency; food bought as the grocery store as well as food from take-out, delivery, restaurants, etc.
  • Housekeeping supplies: laundry detergent, cleaning supplies, sanitizer, postage and delivery services, lawn and garden supplies.
  • Apparel & services: clothing and footwear, clothing storage, dry cleaning, jewelry and repairs.
  • Personal care products & services: hair shampoo, oral hygiene products, shaving products, bathing soaps and products, electric personal care appliances, etc.
  • Miscellaneous: credit card payments, bank fees, school supplies, etc.

Other expenses that the IRS will look at include:

  • Out-of-pocket health care expenses,
  • Necessary transportation (like traveling for work), and
  • Housing and utility bills.

The IRS will look at the average expenses of peers in the locality. The application requires a substantial time investment from both the IRS and the taxpayer. Once the eligibility is determined, taxpayers may find the IRS Form 433-AFileIT - useful as it contains necessary information the IRS will look for. After the taxpayer is confident that they meet the qualifications for the IRS hardship payment extension, it becomes important to know the extension process is next.

2. Know How to Request an Extension for Taxes

If the taxpayer has not filed or paid in a timely manner, they can expect a failure to file fee of 5% for each month of unpaid tax debt. This percentage is composed of 4.5% late filing and 0.5% late payment and caps at 25%. To avoid this, the tax extension could allow the taxpayer time to file their taxes late. See also: IRS tax penalties.

Presently, taxpayers have two main choices: the usual tax extension request and the extension request due to hardship (this page).

Note: the IRS usually accepts the first category while the second takes more time and effort before the IRS considers the application.

More often than not, taxpayers use IRS Form 4868 as the tax extension for the extension form - eFileIT. The taxpayer simply files the form before the tax deadline - usually April 15 following a given tax year - and gives an estimated tax amount sending a payment. The extension does not give more time to pay, but more time to file. As such, a taxpayer should pay their due tax before the deadline in order to reduce or eliminate any IRS penalties.

Form 4868 does not extend the payment of the taxes, only the filing and reporting. The main reason to use Form 4868 is to postpone the failure to file fee, which is 10 times more expensive than the failure to pay fee.

On the other hand, Form 1127 requires the taxpayer to either:

  • File the extension before the tax return date if the taxpayer has not paid any tax liability yet, or
  • Send the tax extension form before the due date in the notice if the tax amount relates to a deficiency (they paid taxes, but lacked funds to pay the whole amount according to the IRS).

Because the requirements are so strict and the process takes longer, the taxpayer should file as early as possible to minimize the application of interest on unpaid taxes. The form itself is straightforward, but proper preparation should be done prior to filling it out.

3. Understand and Get More Information About the IRS Form 1127

Form 1127, if approved by the IRS, gives the taxpayer:

  • An additional 6 months if the tax deadline still exists for the tax year. This requirement means that the taxpayer informed the IRS of current hardship before the tax deadline. Typically, this gives the taxpayer until October 15 of a given year to file.
  • Up to 18 months (1 and a half years) if the reason for hardship is tax deficiency. For delinquent taxpayers, this means having penalties applied and at least some tax debts left unpaid after the deadline.

With Form 1127, penalties no longer apply during the extension, but interest still accrues. Also, if the taxpayer does not pay within the extension, the IRS may apply the penalties retroactively.

For the form itself, the taxpayer will find Form 1127 relatively simpler compared to other letters. Form 1127 has three parts in four pages, but taxpayers only answer the first page. The first part asks two questions: what length of time and what reason (tax deficiency or advance notice of hardships before the tax deadline). Part 2 asks for the reason(s) why the IRS should accept their offer of tax extension due to IRS hardship. Here, the taxpayer should explain their current financial environment and prove current or possible financial hardship.

Lastly, part 3 asks for supporting documents as well as signatures and verification. Taxpayers should also not forget to tick off both boxes in this part, otherwise the IRS will not accept the form. As for supporting documents, examples would be attached proof of assets, liabilities, income, and expenses. Data from these forms should be dated at least three months or earlier to improve the chances of getting approval from the IRS.

4. Look at Other Available Remedies for Delinquent Taxpayers

The IRS does not always grant a hardship tax extension, but that does not mean the taxpayer should give up on minimizing tax debts, fees, and penalties.

If denied, the taxpayer can:

  • Request for an Offer In Compromise. In this request, the taxpayer offers the IRS a lower tax amount with the assurance that the taxpayer can do the following: pay the new offer, show that the old offer would make tax collection difficult for both parties, and assure the delinquent taxpayer will abide by the new agreement.
  • Apply for a Currently Not Collectible tax status. With this tax status, the IRS postpones the application of fees and penalties as well as the collection of the tax debt for a period of time to provide taxpayers time for the stabilization of their finances.
  • Schedule the tax disbursements through an IRS payment plan. By requiring monthly or quarterly payments, the taxpayer can budget the payment of their delinquent taxes better.

The IRS hardship extension is just one of many options available to taxpayers. Choosing the next option in case the IRS rejects the offer can save taxpayers preparation time.

Getting an IRS hardship tax extension has its own complexities above most IRS processes. By following these steps, a taxpayer can save time and money while increasing the chances of a satisfying answer from the IRS.

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