The IRS provides tax debt relief with tax debt payment plans and tax debt reduction options, including Installment Agreements and Offer in Compromise. If you owe back taxes and need IRS tax relief, keep in mind that the IRS will consider your ability to pay before agreeing to reduce your back taxes.
Is the “Ability to Pay” a Factor in the IRS Reducing My Tax Debt?
The IRS assesses a taxpayer’s “ability to pay” their total back taxes before offering to reduce their tax debt. During the IRS assessment, a taxpayer who can afford to pay for basic living expenses after paying their full tax debt is considered to have the ability to pay.
On the other hand, if paying the full tax debt will put a taxpayer in a financial situation where they cannot pay for basic living expenses, the IRS typically reduces tax debt.
What Is the Collection Information Statement Form 433-A?
The IRS assesses your ability to pay back taxes using information that they collect about you and your finances. The agency uses forms such as Form 433-A or Form 433-F to collect this personal financial information. Once the agency sends you the Collection Information Statement forms, you will have to provide details about a range of personal finance details such as:
- Assets that you can use as collateral for a loan, like a house.
- Assets that you can sell to pay your tax debt, like a house, car, or boat.
- Assets that you own but are held by someone else, like money in trust funds, retirement portfolios, or bank accounts.
Notably, Form 433-A is designed specifically for taxpayers who are self-employed and those earning wages. When your case is assigned to an IRS Revenue Officer, they will likely send you the Collection Information Statement form to complete. The form collects the following information:
- Name, social security and driver’s license numbers, and date of birth
- Employment details
- Monthly living expenses
- Paycheck stubs and bank and credit statements
- Business assets and monthly business income if you own a business
- Details about personal assets such as real estate, bank accounts, and vehicles
- Any impending lawsuits, life insurance policies, or trust funds
What Are Allowable Living Expenses Under the IRS Collection Financial Standards?
Allowable expenses are the basic living expenses or collection financial standards that the IRS considers necessary for a taxpayer and their family’s health, welfare, and earning income. These allowable living expenses cover essential items such as food, clothing, rent, car payments, maintenance, medical supplies, prescription drugs, and more.
What Are My Options If the IRS Determines I Do Not Have the “Ability to Pay” My Tax Debt?
If the IRS determines you do not have the “ability to pay” your full tax debt after reviewing your Collection Information Statement, here are a few tax relief options you might qualify for:
- Offer in Compromise (OIC): An OIC is an offer you submit to the IRS to settle your tax debt for less than what you owe. An Offer in Compromise is the best tax relief option if you can’t pay your full tax liability or if doing so puts you in serious financial hardship.
- Partial Payment Installment Agreement (PPIA): A PPIA is an IRS Payment Plan that allows you to pay off a fraction of your tax debt and over an extended timeframe. You’ll make monthly payments until you pay off the reduced tax amount.
- Currently Not Collectible Status: CNC status will temporarily pause IRS collections. However, you will need to demonstrate that paying any of your tax debt will create an economic hardship.
What Are My Options If the IRS Determines I Have the “Ability” to Pay My Tax Debt?
If the IRS determines that you can pay your full tax debt after reviewing your Collection Information Statement, they offer monthly payment options, including long-term Installment Agreements. These IRS payment plans give you the flexibility to pay your full tax debt in smaller monthly payments over time. You’ll have 72-84 months to pay.
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