Why the IRS Says You’re Able to Pay More…

The IRS is like any other creditor.  Their goal is to collect the most money in the shortest amount of time.  The good thing for them (bad for you) is that they make the rules.  It’s important to understand these rules before you start negotiations.

The IRS will typically ask you to fill out a collection statement (Form 433-F or 433-A) that lists your monthly income and expenses.  From there, they will adjust your expenses to the IRS allowable standards.  This is where those IRS-made rules come into play.

The rules can affect you in the following ways:

Disallowed Expenses

The IRS simply does not allow certain expenses when figuring your ability to pay them back. For example, your monthly credit card payments are not considered an allowable expense.

Actual vs. Allowable Expenses

Other expenses may be allowed by the IRS but limited based on the Collection Financial Standards. These standards vary by the amount of people living in your household and the county in which you live.

Let’s look at a simple example to prove these points.  For the sake of this example, let’s say you live in Charleston county, South Carolina, in a two-personal household:

Actual

Income $5,000
Credit Card Expenses $500
Housing & Utilities $2,000
Vehicle Ownership $1,000
Food, Clothing, Personal, Housekeeping $1,500
Remainder to pay IRS
$0

vs.

IRS Allowable

Income $5,000
Credit Card Expenses $0
Housing & Utilities $1,882
Vehicle Ownership $970
Food, Clothing, Personal, Housekeeping $1,132
Remainder to pay IRS
$1,016

As you can see above, despite spending $5,000 in monthly expenses, you are only given credit for $3,984 and the IRS will expect you to pay $1,106 per month to repay your debt.

Before submitting financial information to the IRS, it’s important to understand the rules of this very important game.

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