Any time you’re negotiating with the IRS about paying a tax debt — whether it’s to set up a payment plan based in income or to prove that you can’t afford to make payments — you’ll need to provide documentation to prove your income and household expenses.
When it comes to household expenses, the IRS has a set of standardized allowable amounts for various aspects of life, such as:
- Rent or mortgage payments
- Food & clothing expenses
- Utilities such as electric, internet, cell phone
- Car loans or leases
- Healthcare expenses
Depending on your geographic region inside the U.S., the IRS will allow different maximum amounts for each of those categories that contribute to your allowed total expenses.
That total counts against your income for the purposes of determining how much you can afford to pay the IRS toward your tax debt each month.
Note that if a certain expense of yours is higher than the standardized allowable amount, the IRS will only allow you to use their limit against your income.
For example, let’s say they allow a max car payment of $750/month for your region but your car payment is actually $850/month. Only $750 of your actual expense would count, which could put you in an uncomfortable position where they determine you can afford to pay more than you really feel you can.
More or less, the IRS will determine your ability to make payments to your tax debt based on your total monthly income minus the total allowable monthly expenses. So if your total monthly income was $1500 and the total allowable expenses were $1000, the IRS would say you could afford to make a $500 payment each month.
If these calculations show that based on allowable expenses you aren’t able to make a payment (income – expenses = 0), you can advocate to be placed into what is called “Currently Non-Collectible” status. This basically means that the IRS acknowledges that at this time you aren’t able to make payments and they won’t pursue you will any collection action (like garnishing your wages).
Calculating Your Income
If you’re a regular W-2 employee and receive a salary (or receive the same amount in your paycheck each time) the IRS may accept a paystub or two. Other times, though, they’ll want paystubs from the last 3 months to demonstrate the consistency.
If the amounts of your paychecks vary, the IRS will calculate the average of your last 3 months of income and use that average as your monthly income for the purposes of negotiation.