Short answer
If illness or medical bills leave you unable to pay basic living expenses, the IRS can pause collection (currently not collectible status), must release a levy that causes economic hardship, may remove late penalties for serious illness, and sometimes accepts less through an offer in compromise. Except in an accepted offer, the balance and interest remain.
Key takeaways
- The IRS defines economic hardship as being unable to pay reasonable basic living expenses, and it counts medical costs and health insurance.
- Currently not collectible status pauses most collection, but interest continues, a lien may be filed and refunds are kept.
- The IRS must release a levy once it determines the levy is creating an economic hardship.
- Serious illness of you or an immediate family member can be reasonable cause to remove failure-to-file and failure-to-pay penalties.
- The Taxpayer Advocate Service is free and helps when collection is causing economic harm.
What the IRS counts as economic hardship
The IRS has a written definition, and it is narrower than “money is tight.” Under Treasury Regulation 301.6343-1(b)(4), economic hardship means a collection action would leave an individual unable to pay reasonable basic living expenses. Keeping an affluent or luxurious standard of living does not count. The IRS decides the amount case by case.
Medical costs are part of that test. The regulation lists “medical expenses (including health insurance)” among basic living expenses, and it names “a medical catastrophe” as an extraordinary circumstance the IRS should consider. The IRS also weighs your age, ability to work, dependents and local cost of living. You must act in good faith: inflating expenses or hiding assets defeats a hardship claim.
How medical costs show up in your IRS budget
When the IRS reviews a financial statement, it uses its Collection Financial Standards. The out-of-pocket health care standard covers medical services, prescription drugs and medical supplies such as eyeglasses. It is allowed per person, with one amount for people under 65 and a higher one for people 65 and older, and the IRS allows it without questioning what you actually spend. It comes in addition to what you pay for health insurance. If your real costs are higher, you can claim more, but you must document that the expenses are necessary. Elective procedures are generally not allowed. The current standards took effect June 29, 2026; check the IRS out-of-pocket health care standards page for this year’s amounts.
Pausing collection: currently not collectible status
If paying anything would leave you unable to cover rent, food, utilities and medical care, ask the IRS to mark your account currently not collectible (CNC). The IRS describes it as a temporary pause in collection when you can’t pay because of financial hardship. Most collection activity stops, including new levies.
What CNC does not do:
- It does not cancel the balance. Penalties and interest keep growing, at the federal short-term rate plus 3 percentage points, reset quarterly (7% (IRS.gov, Jul-Dec 2026) this quarter).
- The IRS may still file a Notice of Federal Tax Lien.
- Any federal refund you are due is applied to the balance.
- The IRS may review your finances later and resume collection if your income improves. There is no fixed end date.
To ask, call the number on your notice or 800-829-1040 (IRS.gov, 2026). The IRS may ask for Form 433-F or Form 433-A plus proof of income, living expenses, bank accounts and assets. Time also works in your favor: the IRS generally has 10 years (IRS.gov, 2026) from assessment to collect, and CNC does not stop that clock (see the collection statute guide). The full rules are in our currently not collectible guide, and the other ways to stop collection are in how to pause IRS collection.
If a levy is already taking your income
The law is stronger here than most people expect. Internal Revenue Code section 6343(a)(1)(D) says the IRS shall release a levy when it has determined the levy “is creating an economic hardship due to the financial condition of the taxpayer.” Release is required once hardship is shown; it is not a favor.
Two limits apply. A release does not prevent a later levy on the same property, and it does not reduce what you owe. Pair the release request with a longer-term fix, usually CNC or a payment plan you can afford.
- Call the number on the levy notice right away. Say the levy is causing economic hardship and you cannot pay basic living expenses, including medical care.
- Send proof quickly. A financial statement, recent bills, and medical records showing the illness and its costs.
- Ask for CNC or a plan at the same time, so the levy is not simply reissued.
- If the IRS does not act, contact the Taxpayer Advocate Service (below). An immediate threat of adverse action is one of its case criteria.
Before a levy, the IRS normally sends a final notice such as LT11 or Letter 1058, or a CP504 notice of intent to levy. Acting at that stage is easier than undoing a levy. See the best ways to stop an IRS levy, and if a bank account was frozen, what to do in the 21 days.
Removing penalties when illness caused the delay
A hospital stay or serious diagnosis is one of the situations the IRS lists for reasonable cause penalty relief: “death, serious illness or unavoidable absence of the taxpayer or immediate family.” The Internal Revenue Manual defines immediate family as a spouse, sibling, parents, grandparents and children (IRM 20.1.1.3.2.2.1).
The IRS looks at the dates, duration and severity of the illness, how it prevented you from filing or paying, whether you kept up other obligations, and whether you caught up promptly afterward. Relief can cover failure-to-file and failure-to-pay penalties. If a penalty is removed, the IRS automatically reduces the interest charged on that penalty. The tax itself, and interest on the tax, stay.
What to send: a short account of what happened and when, how it kept you from filing or paying, what you did to try, and records such as hospital records or a doctor’s letter with start and end dates. You can ask by calling the number on your notice; if that does not work, file Form 843.
One exception: the estimated tax penalty generally can’t be waived for reasonable cause, though it can be reduced for a casualty, disaster or other unusual circumstance. The broader rules are in our penalty relief guide.
When an offer in compromise fits
An offer in compromise settles the balance for less than the full amount. Illness can matter under these grounds (a third ground, doubt as to liability, is for disputes about the tax itself):
| Ground | What it means | Where illness matters |
|---|---|---|
| Doubt as to collectibility | Your assets and income are less than the full balance | Lower income and higher allowable medical costs reduce what the IRS calculates you can pay |
| Effective tax administration: economic hardship | You could pay in full, but doing so would cause economic hardship (individuals only) | The regulation’s examples include being unable to earn a living because of a long-term illness, medical condition or disability, and resources foreseeably used up by care |
| Effective tax administration: public policy or equity | Exceptional circumstances make full collection unfair | Rare; the regulation’s example involves a serious illness with near-continuous hospitalization |
The regulation also gives an example of a parent who provides full-time care to a dependent child with a serious long-term illness. An effective tax administration offer needs a detailed written explanation with the Form 656.
The application fee is $205 (IRS.gov, 2026), and both the fee and payments are waived under Low-Income Certification. Run the IRS Offer in Compromise Pre-Qualifier before paying anyone. Our offer in compromise guide covers the math.
Before you use a retirement account to pay
Withdrawals from a 401(k) or IRA before age 59½ usually add a 10% additional tax on top of income tax, which can create next year’s balance. Several exceptions are medical:
- Unreimbursed medical expenses above 7.5% of adjusted gross income (plans and IRAs).
- Total and permanent disability of the account owner (plans and IRAs).
- Terminal illness (employer plans; the IRS lists it as not applying to IRAs).
- Health insurance premiums while unemployed (IRAs only).
- An IRS levy on the plan or IRA is also an exception.
Medical bills may also lower the tax itself: if you itemize on Schedule A, medical and dental costs above 7.5% of adjusted gross income are deductible. For when the IRS can reach retirement money, see retirement account levies.
Records to gather, and a worked example
- Every IRS notice, plus your account transcript (see how to get it).
- Proof of income: pay stubs, disability or Social Security award letters, unemployment statements.
- Medical records with dates: diagnosis, hospital admission and discharge, treatment schedule, a doctor’s letter on your ability to work.
- Medical costs: pharmacy printouts, insurance explanations of benefits, payment plans with providers, premium statements.
- Household bills, bank and retirement account statements, and a list of assets.
Free help, and when a professional is worth it
The Taxpayer Advocate Service is an independent organization within the IRS, and its help is free. It accepts cases where a taxpayer “is experiencing economic harm or is about to,” faces “an immediate threat of adverse action,” or has waited more than 30 days for the IRS to fix an account problem (IRM 13.1.7.3). Call 877-777-4778 (IRS.gov, 2026) or file Form 911 (Rev. 6-2026 (IRS.gov, 6-2026)). Low Income Taxpayer Clinics represent eligible taxpayers for free or a small fee.
Many hardship cases need one phone call and good records. A professional helps most when problems overlap: a levy plus unfiled years, a balance over the plan limits (see relief by balance size), or a hardship-based offer. Your rights in collection are in your IRS collection rights. If you or a family member can’t manage calls right now, a representative with Form 2848 can talk to the IRS for you. Request a free review, or read what a free consultation covers; if the IRS tools will solve it, we will say so.
Frequently asked questions
Not automatically. The IRS can pause collection (currently not collectible), but the balance and interest remain. Actual reduction requires an accepted offer in compromise, which can be based on inability to pay or, for individuals, on economic hardship from long-term illness or disability.
Yes, it can. The IRS lists serious illness of the taxpayer or immediate family as a reasonable cause. You need to show the dates, how it stopped you from filing or paying, and that you caught up once you could. A doctor’s letter or hospital records help.
The IRS must release a levy that it determines is creating an economic hardship, meaning you can’t pay reasonable basic living expenses. Medical costs, including health insurance, count. Call the number on the levy notice and send proof of income and expenses. The balance still remains.
The balance keeps growing with interest and penalties, the IRS may file a lien, and refunds are applied to the balance. The IRS may resume collection if your finances improve. The collection statute keeps running while you are in CNC.
Yes. You can sign Form 2848 to give a tax professional power of attorney to deal with the IRS for you. The Taxpayer Advocate Service can also help if collection is causing harm.
Sources
- Treas. Reg. 301.6343-1, Requirement to release levy (economic hardship)
- 26 U.S.C. 6343, Authority to release levy
- IRS: National standards: Out-of-pocket health care
- IRS: Collection financial standards
- IRS: Temporarily delay the collection process
- IRS: Levy
- IRS: Penalty relief due to reasonable cause
- IRM 20.1.1, Introduction and Penalty Relief (20.1.1.3.2.2.1)
- Treas. Reg. 301.7122-1, Compromises
- IRS: Offer in compromise
- IRS Form 656 Booklet (Form 656-B, Rev. 4-2026)
- IRS: Retirement topics, exceptions to tax on early distributions
- IRS Topic no. 502, Medical and dental expenses
- IRS: Underpayment of estimated tax by individuals penalty
- IRM 13.1.7, Taxpayer Advocate Service case criteria
- Taxpayer Advocate Service
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This page is general information about IRS rules, not tax or legal advice for your situation. IRS figures change; each one links to its official source and the date we last checked it.