If a taxpayer is unable to make their tax payments due to a financial inability to pay them, in some cases they can be granted an Undue Hardship Penalty waiver. This waiver generally only applies to taxpayers who have filed their returns in a timely manner. However, just like the other penalty waiver provisions, this waiver requires that a taxpayer take ordinary business care and prudence in providing for the tax liability.
In order to have this penalty waiver applied, the taxpayer must show that they had the funds to cover the tax liability, but due to unforeseen circumstances, they had to use the funds for other purposes. Or, they can show that if they paid the tax liability when it was due, they would have faced an undue hardship. Finally, if the taxpayer filed bankruptcy, inability to pay is a factor if the taxpayer was insolvent prior to the date the tax was due.
When determining if a taxpayer will be granted a penalty waiver based on undue hardship, the IRS will ask several different questions in evaluating if the request can be granted. They will want to know when the taxpayer knew they could not pay and why they were unable to pay. They will also question if the taxpayer tried to use other means to obtain the funds. They will question if the taxpayer had the funds available at one point to pay their taxes, but used the money for other means. And finally, they will review the documentation provided by the taxpayer that supports their request that they be granted the Undue Hardship waiver.
By understanding the criteria the IRS uses in granting a hardship waiver, you can greatly increase your chances of obtaining one. Make sure when asking for this waiver that your waiver request fits the guidelines provided for meeting this waiver.
Please keep in mind the information and advice presented in this blog is not intended to be used as formal legal advice. Contact a tax professional for personalized tax advice pertaining to your specific situation. While we try and answer all parts of the question when we write our blogs, sometimes there may be some left unanswered. If you have any questions about your problems with the IRS, SBOE, FTB, or BOE, or tax law in general, call RJS Law at (619) 595-1655.