The IRS uses special guidelines known as “IRS Collection Standards” to calculate monthly amounts for payment plans. These standards determine a taxpayer’s ability to pay tax debt and how much they need to pay each month.
We will discuss IRS Collection Financial Standards and how they can help lower your monthly payments to settle your tax debt.
How Does the IRS Come Up With National Standards for Expenses?
As mentioned, IRS Collection Financial Standards help assess a taxpayer’s ability to pay unpaid taxes. The standards are allowable living expenses (ALES) for taxpayers based on household and location.
The IRS derives the National Standards from the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey (CES) for average costs of necessities.
These include food, personal care products and services, housekeeping supplies, clothing, transportation, out-of-pocket healthcare expenses, and miscellaneous allowances.
For example, a family of four is allowed expenses of $2,027 per month:
- Food: $1,143
- Housekeeping Supplies: $82
- Apparel and Services: $300
- Personal Care Products and Services: $97
- Miscellaneous: $405
Where Can You Find the Latest IRS Collection Standards by Category?
You can view the latest IRS Collection Standards by category on the IRS National Standards for Food, Clothing, and Other Items web page: https://irs.gov/businesses/small-businesses-self-employed/national-standards-food-clothing-and-other-items.
The current Standards were last updated April 22, 2024.
What Happens If Your Expenses Exceed National Standards?
You are allowed the full monthly National Standards allowance for your family size without needing to justify the actual amounts spent.
However, if the claimed amount exceeds National Standards for essential items like food, housekeeping supplies, clothing, personal care, and services, you must provide documentation to support these additional necessary expenses.
In this case, the IRS will require you to pay the excess amount towards your tax debt through your payment agreement.
How Does the IRS Use Collection Standards to Determine Your Ability to Pay Tax Debt?
Each year, the IRS sets specific allowable expenses amounts based on family size and location for five categories: apparel, food, housekeeping, personal care, and miscellaneous.
You are allowed to deduct these monthly expenses from income, and the IRS compares income to allowable expenses to determine your ability to pay off tax debt.
Allowable total monthly expenses range from $808 (individual) to $2,027 (four-person household). Families of more than four can add $386 in expenses per additional person.
How Can IRS Collection Standards Lower Your Monthly IRS Payment Plan Amount?
When you set up a monthly payment plan with the IRS, they will compare your monthly income to your allowable living expenses. If your actual expenses are lower than National Standards, the IRS allows you to deduct them. In such a case, your income will be lower, and the monthly payment amount for your payment plan would also be reduced.
However, if your actual expenses are higher than what the IRS allows in these categories, you can only deduct the amount specified in the standards, which could result in more income. This, in turn, might lead to a higher monthly payment amount for your IRS payment plan.
What Is the IRS “Six Year Rule” for Repaying Tax Debt?
In scenarios where taxpayers are unable to fully pay their taxes and do not meet the streamlined agreement criteria, they might still be eligible for the IRS Six Year Rule.
This rule stipulates that all expenses are allowed for taxpayers who can fully pay their tax debt within six years. It allows for payment of living expenses that exceed Collection Standards and other expenses like credit cards and payment on student loans, provided a taxpayer can pay their tax liability, including applicable penalties and interest, in six years.
Collection Financial Standards are used by the IRS as a reference point to assess a taxpayer’s expenses and establish what portion of income can be used to settle the tax liability.
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