IRS Collection Financial Standards
Collection Financial Standards are used to help determine a taxpayer’s ability to pay a delinquent tax liability. Allowable living expenses include those expenses that meet the necessary expense test. The necessary expense test is defined as expenses that are necessary to provide for a taxpayer’s (and his or her family’s) health and welfare and/or production of income.
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If you have an unpaid tax balance and don’t qualify for a streamlined installment agreement or believe you cannot make any payments, the IRS will require that you complete a financial statement (Form 433-F or 433-A). They will analyze your assets, income and expenses to determine your ability to pay.
For certain expenses, the IRS will allow up to a specific amount known as the collection financial standards. However, if you can prove with receipts that you spend more than the allowable amounts and the extra expenses are required for the health and welfare of the family or for the production of income, the IRS may allow the additional amounts.
The IRS uses these standards which are updated annually, to determine your ability to make a payment. The IRS has standards for:
- Food, clothing and miscellaneous expenses
- Housing and utilities
- Transportation (car payment, car maintenance, public transportation), and
- Out-of-pocket health care expenses.
Other necessary expenses such as child care do not have a specific standard but must be reasonable. Some expenses such as private school or college tuition are not considered necessary expenses and are not allowed unless you qualify under the six-year or one-year rules. The six-year rule allows reasonable expenses that do not meet the standards if you can pay your balance due in full within six years or by the collection statute expiration date, whichever is earlier.
If you are unable to pay your balance due in full within six years, the IRS may allow you one-year to modify or eliminate some expenses that are above the standards. This may give you the ability to pay the full liability plus accruals within the six-year limit.
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