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Taxpayers in tax debt often consider IRS tax debt reduction plans to get back tax relief. In order to get relief, one important consideration is the “ability to pay.” The IRS considers the paying capacity of the taxpayer before agreeing to reduce their back taxes. Any taxpayer wanting to reduce their tax debt needs to check if they fulfill this IRS condition.
The IRS offers a reduction in tax debt through their tax debt reduction plans such as an Offer in Compromise and a Partial Payment Installment Agreement. For both these back taxes reduction plans, the IRS looks at the applicant’s “ability to pay.” If the taxpayer can afford to pay for basic living expenses after he/she has paid their full tax debt, then the taxpayer is said to have the “ability to pay.” On the other hand, if paying the total tax debt will cause the taxpayer to be unable to pay for basic living expenses, the taxpayer qualifies for tax debt reduction because he/she does not have the “ability to pay.”
Basic living expenses or what the IRS calls ‘allowable living expenses’ or ‘collection financial standards’ are the expenses that the tax agency believes to be necessary for the taxpayer and his or her family’s health and welfare, and also the production of income. These include food, clothing, personal care, medical services, prescription drugs, medical supplies, rent, property taxes, car payments, maintenance, and so forth.
When collecting back taxes, the IRS cannot damage your ability to generate income. For instance, if you need to make certain expenses in your small business to generate income, then the IRS cannot push you into a financial situation by collecting back taxes where you are not able to pay for those basic expenses for running your business.
The taxpayer in tax debt and his/her dependents are allowed by the IRS to keep the total National Standards amount based on their family’s size. These are the basic expenses. No matter where you reside, the National Standards for basic expenses apply to you except for housing, utilities, and transportation, which change according to location and are called ‘local standards.’
Before you apply for tax debt reduction, you need to calculate your basic living expenses. The IRS has strict guidelines when it comes to tax debt reductions. Since they look to get the most in back taxes, they will only allow what’s basic according to them. You can negotiate with the IRS on how much you can pay in back taxes, the duration of payments, and basic expenses that they should allow you.
Usually, a tax attorney is better qualified to negotiate with the IRS on those aspects. A qualified tax attorney or a tax resolution company housing a qualified tax attorney knows better what can be negotiated and how. Therefore, if you do not accept all the terms and conditions laid down by the IRS when considering tax debt reduction, you can hire a tax attorney to negotiate.
Below are the National Standards for Allowable Living Expenses.
Source: The IRS
These are what the IRS considers basic expenses. Apart from these, if you have an expense that is basic for your health and wellness, then you may need to negotiate with the IRS. The IRS considers themselves the first creditor and wish to collect back taxes over other debts that you may have. In such cases, you may need to hold talks with them and negotiate to get a better agreement.
If you don’t have the ability to pay, then the IRS will reduce your back taxes to what you can afford to pay. They will allow you basic living expenses. You can pay the reduced tax debt in a single lump-sum payment or pay it in installments, as agreed upon under the IRS Offer in Compromise or a Partial Payment Installment Agreement plan.
Before you enter into an agreement with the IRS, it is preferable to consult a tax professional to ensure that you have the most favorable agreement. If you are uncomfortable with any of the conditions of the agreement, know that negotiation with the IRS is possible.
Taxpayers that cannot pay any amount in back taxes due can also achieve an agreement with the IRS through the Currently Not Collectible status. The agreement stops all collection actions by the agency, such as lien and levy. If you are in a financial condition where you cannot pay any part of your tax debt, you can consider applying for the Currently Not Collectible status.
In this agreement, you pay your tax debt when you can afford to pay it. The IRS stops all collection actions against you and waits for your financial condition to improve. Before agreeing to put your tax debt case under the Currently Not Collectible status, the IRS conducts a comprehensive financial analysis to determine your ability to pay.
If you have the ability to pay, then you don’t need to apply for any of the IRS tax debt reduction plans. The IRS rejects applications for tax debt reduction where the taxpayer can clearly afford to pay. Not only that, but the IRS also keeps any initial payment you send with your application and applies that amount to your tax debt. However, they return the setup fee.
The IRS has other plans for resolving tax debt, such as Installment Agreements. These are for taxpayers who have the ability to pay. You can explore Installment Agreements to pay your full tax debt in installments.
Reductions in tax debt can be achieved, but you need to consider your ability to pay before applying for an IRS tax debt reduction plan. If you qualify, the IRS will reduce your tax debt to what you can afford to pay. However, you need to remember that the IRS looks to collect the most that they can. Therefore, they may not allow you expenses that they think are not basic expenses. For getting into the most comfortable agreement, it’s advisable to use help from a tax attorney or a tax debt resolution company to get the maximum benefit possible.