What Form 1127 Is For

Form 1127 is your lifeline when you legitimately owe taxes but paying them by the deadline would cause you serious financial harm. This IRS form lets you request extra time—typically up to 6 months, sometimes longer—to pay taxes you've reported on your return or taxes determined after an IRS examination (called a deficiency).

Think of Form 1127 as distinct from a filing extension. A Form 4868 gives you more time to file your tax return, but it doesn't extend your payment deadline. Form 1127, on the other hand, specifically addresses the payment deadline when paying on time would create ""undue hardship.""

What qualifies as ""undue hardship""? The IRS defines it as more than mere inconvenience. You must demonstrate that paying the tax on the due date would force you to sell property at a sacrifice price or cause substantial financial loss. For example, if paying your tax bill would require you to liquidate retirement investments at a steep loss or sell your business equipment below market value, you might qualify. Simple cash flow problems or the need to reduce your savings typically don't meet this threshold.

Form 1127 applies to various tax types including income taxes, self-employment taxes, gift taxes, and taxes on private foundations. It can be filed for the tax shown on your original return or for deficiencies the IRS determines after examining your return.

IRS.gov - About Form 1127

When You’d Use Form 1127 (Late/Amended Scenarios)

You should file Form 1127 as soon as you realize you cannot pay your tax without causing undue hardship. Timing is critical:

For Taxes Shown on Your Return

Form 1127 must be received by the IRS on or before your return's due date (not including extensions). For example, if your 2016 Form 1040 was due April 18, 2017, Form 1127 needed to arrive by that date even if you had a filing extension to October.

For Deficiency Assessments

If the IRS examines your return and determines you owe additional tax, Form 1127 must be received by the payment due date shown on the tax bill you receive.

Important Distinction

Form 1127 is not for late filing situations. If you haven't filed your return yet, you still need to file it by the deadline (or get a filing extension). Form 1127 only addresses when you can pay the tax, not when you must file the return.

Amended Return Considerations

If you file an amended return (Form 1040-X) that increases your tax liability, and paying that additional tax would cause undue hardship, you should file Form 1127 with the amended return or as soon as the hardship becomes apparent.

Retroactive Use

Form 1127 also cannot be used retroactively. If you've already missed the payment deadline, the form won't help you avoid penalties that have already started accruing—though you might qualify for penalty relief through other means like First Time Abate or reasonable cause.

IRS.gov - Form 1127 PDF

Key Rules for 2016

For the 2016 tax year, several specific rules governed Form 1127 applications:

Extension Length Limits

• For tax shown on a return: Generally no more than 6 months from the original due date
• Exception for taxpayers abroad: Extensions beyond 6 months might be granted
• For deficiencies: Generally limited to 18 months from when payment is due, with a possible additional 12 months in exceptional circumstances

Prohibited Situations

What won't qualify: Extensions for deficiencies caused by negligence, intentional disregard of rules and regulations, or fraud with intent to evade tax are specifically prohibited.

Interest and Penalties

• Interest continues to accrue: Even if your extension is approved, interest on the unpaid tax continues from the original due date until you pay. There's no relief from interest charges—only from potential penalties.
• Penalties may apply: If you don't pay the tax within the approved extension period, penalties can be imposed on top of the continuing interest.

Required Documentation (Mandatory)

Your application must include both of these or it will be rejected:

• A statement of your assets and liabilities as of the end of last month, showing both book and market values
• An itemized list of income and expenses for each of the 3 months prior to the tax due date

Payment Responsibility and Filing Location

Payment responsibility: You must pay the tax before your extension expires. Don't wait for a bill from the IRS—it's your responsibility to track the deadline and make payment.

Where to file: Generally, you file with the IRS Advisory Group Manager for your area (see IRS Publication 4235 for addresses). However, gift tax applications (Forms 709 or 709-NA) go to a specific address in Florence, Kentucky.

IRS.gov - Form 1127 Instructions

Step-by-Step (High Level)

Overview

Below are the major steps to complete and file Form 1127 for the 2016 tax year.

Step 1: Verify you need Form 1127

Before starting, confirm you can't use simpler alternatives. If you need monthly payments over time, Form 9465 (Installment Agreement) might be better. Form 1127 is specifically for getting time to arrange full payment, not for setting up payment plans.

Step 2: Complete the header information

Enter your name, address, Social Security Number (or EIN for businesses), and identifying information exactly as it appears on your tax return. For joint filers, include both spouses' names in the same order as your return.

Step 3: Fill out Part I (Request for Extension)

• Check the appropriate box indicating whether this is for tax shown on your return or for a deficiency
• Enter the form number (like ""1040"" or ""1120"")
• Specify the tax year
• State when the tax is originally due
• Propose a date by which you can pay (within the limits mentioned earlier)
• Enter the exact amount of tax you owe

Step 4: Complete Part II (Reason for Extension)

This is the most critical section. Provide a detailed, specific explanation of the undue hardship. Generic statements like ""I don't have the money"" won't suffice. Instead, explain:

• What assets you have and why you can't liquidate them without substantial loss
• What specific financial hardship would result from paying on time
• Why borrowing isn't feasible
• What changed since the tax liability arose

Step 5: Attach Part III (Supporting Documentation)

You must attach both required items:

• Financial statement showing all assets and liabilities (with market values) as of last month's end
• Itemized income and expense statements for the 3 months preceding the tax due date

Be thorough and accurate. The IRS uses these documents to verify your hardship claim.

Step 6: Sign and date

Both spouses must sign if this is for a joint tax liability. False statements can lead to perjury penalties.

Step 7: Mail to the correct address

Check IRS Publication 4235 for your local Advisory Group Manager's address, or use the special address for gift tax applications. Keep copies of everything you submit.

IRS.gov - Form 1127 Instructions

Common Mistakes and How to Avoid Them

Mistake #1: Missing required documentation

The most common reason applications are rejected is incomplete supporting documentation. Many applicants provide a financial statement but forget the 3-month income/expense detail, or vice versa. Solution: Before mailing, double-check that both required attachments are included.

Mistake #2: Vague hardship explanations

Saying ""I can't afford to pay"" without specifics will get your application denied. The IRS needs to understand exactly what financial loss you'll incur. Solution: Be specific. Include dollar amounts, explain asset valuations, describe market conditions affecting potential sales, and detail why borrowing isn't viable.

Mistake #3: Filing too late

Submitting Form 1127 after the payment due date means you've already missed the deadline. The form can't reverse penalties that have started accruing. Solution: File as soon as you realize you'll face hardship. Don't wait until the last minute.

Mistake #4: Confusing this with a filing extension

Form 1127 doesn't extend the deadline to file your return—only to pay the tax. You still need Form 4868 if you need more time to file. Solution: File your return on time (or get a proper filing extension) even if you're requesting a payment extension.

Mistake #5: Requesting unrealistic extension periods

Asking for 12 months when regulations typically limit extensions to 6 months will likely result in a modification or denial. Solution: Request a reasonable period based on when you can realistically arrange payment, keeping regulatory limits in mind.

Mistake #6: Inadequate financial information

Providing outdated financial statements or incomplete asset listings undermines your credibility. Solution: Use the most recent month-end data, and be comprehensive. Include all assets—even those you consider exempt—and accurately state both book and market values.

Mistake #7: Not following up

After filing Form 1127, some taxpayers assume silence means approval. Solution: The IRS will respond with an approval, denial, or request for more information. If you haven't heard back within a reasonable time (typically 30-60 days), follow up with the office where you submitted the form.

Mistake #8: Failing to pay by the extended deadline

Getting an extension approved doesn't mean you're done. You must still pay by the new deadline. Solution: Mark your calendar with the approved payment date and arrange payment in advance. Missing the extended deadline can result in immediate collection action.

IRS.gov - About Form 1127

What Happens After You File

Once you submit Form 1127, it goes to the IRS Advisory Group Manager for your area for review. Here's the typical process:

Initial Review (1–4 Weeks)

An IRS employee examines your application for completeness. If required documentation is missing or the hardship explanation is insufficient, they'll send you a letter returning the application as ""nonprocessable."" You'll have an opportunity to correct deficiencies and resubmit.

Substantive Review (4–8 Weeks)

If the application is complete, an IRS officer analyzes your financial situation to determine whether you genuinely meet the undue hardship standard. They may request additional information or clarification. Respond promptly to any such requests—delays can result in denial.

Decision Notification

Approved

You'll receive a letter specifying the new payment deadline. Note that interest continues to accrue, and you're responsible for making payment by the new date. The IRS won't send you a reminder bill.

Denied

The letter will explain why your request was denied. You typically have appeal rights, though the process can be time-consuming. Consider alternative payment arrangements like installment agreements.

Returned/Nonprocessable

Your application had deficiencies. You can correct them and resubmit, but make sure to do so before the original payment deadline passes.

While Waiting

During the review period, penalties and interest continue to accrue on the unpaid balance. If the IRS approves your extension, failure-to-pay penalties may be removed for the extension period (though not interest). If denied, all penalties and interest remain.

After Approval

You must pay the full tax amount by the approved deadline. The IRS will not send reminder notices. If you miss the extended deadline, the IRS can immediately begin collection actions including liens and levies. The fact that you previously received an extension won't provide any additional protection.

Additional Conditions

The IRS may impose conditions on approved extensions, such as requiring you to provide updated financial information or to make partial payments during the extension period. Failure to comply with these conditions can void the extension.

IRS.gov - Form 1127 PDF

FAQs

Q1: Is Form 1127 the same as an installment agreement?

No. Form 1127 gives you additional time to pay the full amount in one payment, while Form 9465 (Installment Agreement) sets up monthly payments over an extended period. If you can't pay in full even with the 6-month extension Form 1127 provides, an installment agreement is probably more appropriate. Form 1127 is best for situations where you can arrange full payment (perhaps through refinancing or selling assets) but need a few extra months to do so without financial loss.

Q2: Will filing Form 1127 stop IRS collection actions?

Not automatically. Filing Form 1127 doesn't create an automatic stay on collection activity. However, as a practical matter, the IRS typically won't initiate aggressive collection while your application is under review. That said, if you already have liens or levies in place, Form 1127 won't automatically release them. If you're facing imminent collection action, contact the IRS officer handling your case to discuss the pending Form 1127 application.

Q3: Can I file Form 1127 if I'm already on a payment plan?

Generally no. Form 1127 is designed for taxpayers who haven't yet arranged payment. If you're already in an installment agreement and need to modify it, you'd work through the installment agreement process rather than filing Form 1127. However, if you have a new tax liability (from a different year) not covered by your existing agreement, you could file Form 1127 for that separate liability.

Q4: What if I'm denied? Can I appeal?

Yes, you have appeal rights. The denial letter should explain your options. Typically, you can request an Appeals conference to present additional evidence or arguments. Alternatively, you might want to explore other payment options like an installment agreement or, if you qualify, an Offer in Compromise. Don't ignore a denial—continuing penalties and interest make immediate action important.

Q5: Does Form 1127 eliminate penalties and interest?

No. Interest continues to accrue from the original due date until you pay, regardless of whether you get an extension. Failure-to-pay penalties (normally 0.5% per month) may be suspended during an approved extension period, but they'll resume if you don't pay by the extended deadline. And importantly, if your extension is denied, all penalties that would have accrued are assessed.

Q6: I'm self-employed and business is slow. Does that qualify as undue hardship?

Probably not by itself. Cash flow problems or business downturns typically don't meet the undue hardship standard unless they force you to sell assets at a substantial loss. For example, if slow business means you'd have to liquidate inventory at 50% of cost, or sell essential business equipment below market value, that might qualify. But if you could pay the tax by reducing business investment or personal savings without selling assets at a loss, the IRS likely won't consider it undue hardship.

Q7: How long does the IRS take to decide on Form 1127?

Processing times vary, but typically expect 4-8 weeks for a decision, assuming your application is complete. Incomplete applications take longer because the IRS must return them and wait for you to resubmit. If you haven't heard anything within 60 days, contact the IRS office where you filed. Remember: during this waiting period, interest continues to accrue, so delayed approval isn't necessarily advantageous.

Additional Resources

IRS Form 1127: https://www.irs.gov/forms-pubs/about-form-1127
IRS Publication 594 (The IRS Collection Process): https://www.irs.gov/publications/p594
IRS Publication 4235 (Collection Advisory Offices): Available through IRS.gov

Note: This guide is based on 2016 rules and regulations. Tax laws change periodically, so always verify current requirements at IRS.gov or consult with a tax professional for your specific situation.