If you think that you can get away with not paying taxes that you owe the IRS, think again. Very few people ever get out of paying tax debt, and when they do, it is usually because they have successfully proven that they honestly are unable to pay their tax debt now and most likely will never have the funds to pay it in the future.
If you owe the IRS money and can show the IRS you truly cannot afford to pay in full, it is rare and often cumbersome to settle your debt for less with mechanisms like an offer in compromise, partial payment installment agreement and so forth.
Generally, when you owe taxes and believe you can’t pay in full, be prepared for the IRS to examine your income and expenses thoroughly. They usually can obtain this information from a 433-A, 433-B, or 433-F. The IRS will ultimately make the final determination as to whether you can afford to pay your debt and, if so, how much you can afford to pay, using IRS Collection Financial Standards, which were revised and became effective 10/3/2011.
To determine your ability to pay taxes owed, the IRS looks at a variety of criteria, including:
- What living expenses are necessary for the health and welfare of you and your family
- The cost of living in your area.
- How many people are in your immediate family and what their ages are.
- How much your household income is and how many people in your family are employed.
- If you have any assets that could be sold to pay your tax bills, such as stocks, bonds, IRAs, pension plans, rental properties that could be liquidated, recreational vehicles and more.
IRS Collection Financial Standards
The IRS has set strict National Standards or living expense standards to help in determining your ability to pay. National Standards are nationwide allowances for food, clothing, and health care expenses that are out of pocket. Local Standards are applied for housing, utilities, and transportation.
When looking at your living expenses in relation to your income, the IRS will only allow for specific expenses with a cap on what the cost of each of those expenses can be. Legitimate expenses include food, clothing, housekeeping items, personal care items, transportation, healthcare costs, and housing and utility expenses.
Housing & Utilities
Housing and utility allowance is determined by where you live. The allowance is calculated using data from the US Census Bureau along with other local data from your area. Included in your housing and utilities allowance is your monthly mortgage payment or cost of rent, property taxes, any normal maintenance and repairs, the cost of heat, hot water and electricity, garbage collection, insurance, telephone, internet, and television service.
For example, according to the IRS website, if you live in Fairfield County in Connecticut, a family of one would receive a maximum allowance of $2,531.00 for your housing and utilities cost in 2018. As the number of people in your family increases, your allowance goes up. The maximum allowance in Fairfield County is $3,550.00 per month for a family of five or more.
The amount of allowed transportation costs is figured by looking at the cost of owning the vehicle plus the vehicle’s operating costs, which can include insurance, maintenance and repairs, parking, tolls, fuel costs, and any necessary licenses and inspections. The cost of owning the vehicle is calculated on a national level and operating costs are determined by where you live.
The cost allowed for vehicle ownership is $486.00 for one car or $992.00 for two cars. In order to get the allowance for two cars, you must show that both cars are needed either for work or medical reasons. If you do not own a car but take public transportation, then your allowance each month is $182.00. Operating costs in your area can be found on the IRS Website.
Out-of-pocket costs – within reason – can be included in your total living expenses. You can include the cost of out of pocket medical expenses, prescription drugs and eye care (including eyeglasses). According to the IRS website, elective health procedures – such as plastic surgery and even dental care – are not allowed.
The total amount that you can receive for medical expenses each month is $60.00 per person in your household under the age of 60 and $144.00 for each person in your household over the age of 60.
Food, Clothing & Miscellaneous Living Expenses
You are also allowed to include a certain amount per person to cover food, clothing and other necessary personal and household expenses. According to the IRS, you can include food purchased at the grocery store and food from eating out only when you are away from home. You can include personal care items like the cost of bath products and hygiene products. Household products can include items like cleaning and laundry supplies, as well as the cost of postage, lawn and garden supplies, etc. Finally, apparel costs can include clothing and footwear or material to make clothing along with the cost of dry cleaning and alternations.
The IRS has listed on their site the maximum amount allowed for the above-listed expenses. For example, a household of one is allowed a total of $300.00 for food each month, and a household of four is allowed $757.00 a month.
The IRS will usually allow you to add in other expenses like taxes being withheld from your paycheck, child support, child care if both spouses work, payments on other secured debt, student loan payments being made to the federal government, any required work dues like union dues and other court-ordered payments.
Expenses Not Allowed
Of course, there are numerous expenses that the IRS does not consider allowable or necessary when it comes to determining whether you can pay your tax bill. These include everything from your child’s cell phone bill to tuition payments at a private school, the cost of a timeshare, the cost for a recreational vehicle or boat, and more.
Determining Whether You Can Pay
Once the IRS has looked at all of your expenses, assets and your income, they will then determine a resolution mechanism such as an installment agreement request you made, an offer in compromise you submitted, request for uncollectible status, and so forth.
You should work with a tax professional (CPA, enrolled agent, tax attorney) when filling out Form 433-A, B, 433-A (OIC), 433-B (OIC) or 433- F. Complying with the IRS is generally your best bet, if not, you risk the IRS seizing your wages, bank accounts, placing a lien or levy on your home and more.