Economic Hardship is a kind of get-out-of-jail-free card when it comes to dealing with IRS Collections Division. It can be used to get a levy released or an Offer-in-Compromise accepted if the financial analysis showed the result would place the taxpayer in an economic hardship
So, just what is an Economic Hardship? Economic hardship occurs when a taxpayer is unable to pay reasonable basic living expenses. The IRS considers the taxpayer’s equity in assets and expected cash flow to determine how much money should be available to pay their tax debts. This information is brought together with a formula that is called the Reasonable Collection Potential or RCP. Much of the “reasonableness” in the formula comes from various tables of allowed or allowable living costs.
Plug all the numbers into the RCP and if the result is positive, the IRS figures you can make payments. If the number comes out negative, then you are in an Economic Hardship situation.
This leads us to one of the major reasons for Offers-in-Compromise to fail. Nobody did the RCP analysis and instead made an offer that was unacceptable on the face of it.
