You may be concerned about what the IRS will do if you are unable to repay your taxes.
After all, the IRS wants to get paid, and has powerful ways to do it, like levying your wages and bank accounts.
But if the IRS took your paycheck you and your family would be in financial hardship.
You don’t want that, and believe it or not, neither does the IRS.
There are programs to help
The reality is that the big, bad IRS has a program that stops them from putting you in hardship so you cannot pay your bills. They can agree to let you pay your bills ahead of them, and if there is nothing left, to mark your account as unable to pay.
If you qualify, there is no collection on their end and no repayment on yours.
No levies, no calls from IRS agents, your IRS debt put on the shelf without intrusion into your affairs.
To get the IRS to agree, they will need to review your finances to confirm that payment creates a financial hardship. This entails telling the IRS about your (1) household income, (2) living expenses, and (3) your property.
The Collection of Information Statement
To show the IRS you cannot pay, they will require completion and filing of a Collection Information Statement (CIS). The CIS contains financial questions the IRS needs to determine if you qualify for financial hardship.
There are three different CIS forms:
- IRS Form 433A, Collection Information Statement for Wage Earners and Self-Employed Individuals. The 433A is used if you have an IRS Revenue Officer assigned to your file. If this is the case, you will know it. Revenue Officers are local IRS collection agents. They will make direct contact with you, possibly starting with a visit to your home or business.
- IRS Form 433F, Collection Information Statement. Form 433F is for the IRS Automated Collection Service (ACS). ACS is an IRS call center, manned by collection agents taking inbound calls on an IRS 1-800 number. You will never see one, meet one, or talk to the same ACS agent twice. You will be calling ACS to respond to an IRS computer-generated letter, or if you do not have a Revenue Officer.
- IRS Form 433B, Collection Information Statement for Businesses. If you have a business that owes taxes, the IRS requires completion of Form 433B. This can be provided to either a Revenue Officer or ACS, depending on where your case is in the IRS collection inventory.
The IRS will approve financial hardship if your collection information statement shows that:
- Paying the IRS will force you to be unable to pay reasonable basic living expenses.
- You have no assets or no equity in assets.
Beware of how the IRS looks at your living expenses.
They will take your living expenses off your Collection Information Statement and match them to their chart of reasonable and basic living expenses. They are looking for expenses to be more than their chart.
Here are some examples of what the IRS considers to be reasonable and basic:
- Maximum they will allow on a car payment is $508/month.
- Car operating expenses (gas, maintenance, repairs) are based on where you live, and range from $190 – $319/month.
- Housing and utilities are based on where you live, and how many are in your family. For example, for a family of four, they cannot exceed $2,145/month.
- Groceries, clothing, entertainment, and meals are based on the size of your family, and allowed up to $727/month if you are single with no dependents to $1,786/month for family of four in Houston, Texas, for example.
At the same time, there are expenses the IRS will not allow at all, including:
- Credit card payments.
- Private school tuition.
- Charitable contributions.
If you have no money left after the IRS applies their chart of allowable living expenses, and no valuable assets, your claim to financial hardship could be approved.
But if your living expenses are not reasonable and basic the IRS will not consider them as necessary and will want that money redirected to them in a payment plan.
This seems unfair for the IRS to immediately force you to not pay your car loan, mortgage, and tuition for your children, and pay them instead.
Fortunately, the IRS can allow variances to their allowable living expenses.
For example, Internal Revenue Manual 184.108.40.206 permits a housing and utility expense variance over the allowance, stating as follows:
“When deciding if a deviation is appropriate, consider the cost of moving to a new residence; the increased cost of transportation to work and school that will result from moving to lower-cost housing…“
The Internal Revenue Manual makes it clear that the IRS will be reasonable in their treatment of your living expenses. For example, they must consider the cost to move in allowing your housing. If you could afford to move, you could afford to pay the IRS, right?
Additional IRS guidance gives you expense variances if it is justified or reasonable, such as a high car payment from credit limits, or the need for a specialized work vehicle.
If properly requested, IRS agents can also show compassion to give you time to eliminate an expense, then start paying later.
If you are facing financial hardship, IRS guidelines permit them to not force any payment. But getting the IRS to agree requires disclosure of your household finances and ownership of property. Before jumping in, you should know if your budget matches up to the IRS chart of allowable living expenses. If it does not, care must be taken to understand IRS variances and how to get them approved. Owing the IRS when times are tough can be okay, and with proper planning they can agree to help.