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When it comes to federal taxes, getting behind on them can be a daunting challenge, especially when the amount of tax owed is too big to pay off without dipping into essentials. Simply owing taxes to the IRS does not necessarily qualify someone for tax relief.

When determining what collection options may be available, the IRS typically takes into account your financial situation, your past tax obligations, and your income, your assets, your expenses, your debts, and your future financial ability. Each program may have different eligibility requirements, and the IRS may ask for a lot of financial information before deciding to make a loan.

Taxpayers can make better sense of what the IRS looks for when deciding how to file their taxes and not think that a high tax bill means they are eligible for forgiveness.

Tax relief does not necessarily mean one set of tax relief programs offered by the IRS, but can actually mean a variety of options.

Under certain conditions, taxpayers might be eligible to receive any of the following:

• An installment agreement
• An Offer in Compromise (OIC)
• Currently Not Collectible (CNC) status.
• Penalty relief
• Other options for collection or administrative remedies

These options have varying effects. For instance, an installment agreement typically takes place over a period of time, or an eligible taxpayer may be eligible to settle for less than the total liability under an offer in compromise, as long as there are appropriate conditions.

The IRS is not just concerned with the overall amount of tax debt. It takes into account whether the taxpayer has the ability to pay and, in some programs, what the taxpayer may be expected to pay.

One of the key components in the financial picture is income.

The IRS has a list of sources of funds that might be reviewed, such as wages, self-employment income, pensions, Social Security, investment income, rental income, and more.

The analysis can be more complicated if the income of a business owner or a self-employed taxpayer is variable.

The IRS might consider:

• Gross and net business income.
• Recent income trends
• Payroll
• Business expenses
• Bank activity
• 1099 income
• Other recurring sources of income

One taxpayer with a high gross income can have large dollar amounts for necessary expenses. On the other hand, if you have previously earned a large sum of money but now have a temporary drop in income, you could be questioned if your past income history suggests that this trend is set to continue.

Tip

Maintain accurate & up-to-date financial records. Income reported should be backed up by bank statements, pay stubs, profit and loss statements, and other records.

The IRS won’t deem that you’ve ceased payments on your basic bills to meet a tax debt.

But not all costs are considered to be essential or deductible for collection.

The IRS will look at the costs associated with expenses for necessities, including:

• Housing and utilities
• Food and clothing
• Transportation
• Health care
• Taxes
• Certain insurance
• Other essential expenses of living

Various IRS collection financial standards may affect the evaluation of some expenses. Thus, actual expenses and applicable standards can become an important aspect of determination of taxpayer’s ability to pay.

Spending that is not necessary, is excessive, or considered luxury may be subjected to closer examination.

Tip

Make sure you don’t make up the bills just because you’re trying to cut back how much you can afford! Rather, record legitimate expenses promptly and accurately, and be ready to clarify unusual or significant costs.

Income is the means by which the IRS is told about money coming in. Another aspect of the financial situation arises from assets.

Assets the IRS may include are:

• Bank accounts
• Real estate
• Vehicles
• Investments
• Retirement accounts
• Business interests
• Valuable personal property
• Digital or other financial assets.

Importantly, there’s a distinction between having an asset and the IRS considering the entire market value to be cash on call.

These questions may include those around the asset’s value, its liabilities, ownership, and potential equity.

In general, equity is the dollar amount of a transaction after the debts are deducted from the value of the assets.

A sample taxpayer’s home, for instance, is valued at $700,000, but the homeowner has a mortgage of approximately $550,000. The gross value of the property is $700,000, whereas the taxpayer’s equity in the property is significantly less when the outstanding mortgage is taken into account.

The same fundamental idea works for other assets, such as automobiles, real estate, and so on.

The IRS could look at how much equity is in the assets and determine whether it can be used to pay the tax obligation.

Why This Matters

Two taxpayers may be faced with the same amount of tax but manifest very different financial profiles. The analysis for a collection might be different for a taxpayer with a high level of available equity compared to a taxpayer with little or no equity.

Don’t assume that debt vanishes just because it’s owed to the IRS.

The taxpayer may have other debts, such as mortgage debt, auto loans, credit, student loans, medical bills, and more. However, the IRS can tell the difference between various kinds of debt, and may not consider all private liabilities equally when determining a person’s ability to collect.

This is especially crucial when a taxpayer thinks that if they have a substantial credit-card debt, the IRS will be able to cut back on the cash they expect to receive. The determining factor is usually whether the overall financial situation of the taxpayer proves that they have a true inability to pay the tax under the existing collection options.

One of the lesser-known issues is filing compliance.

While a taxpayer may be able to afford limited payment, unpaid taxes can hinder relief efforts for some types of relief. Prior to taking a collection alternative, it is important that taxpayers know if all tax returns have been filed and if ongoing filing and payment requirements are being met.

This is especially important for taxpayers with:

• Multiple unfiled returns
• Self-employment income
• Business tax obligations
• Payroll tax issues
• Substitute-for-return situations
• IRS Notices recently received

The filing of missing returns can also impact the overall tax liability and financial position.

Tip

Failing to file returns because you can’t pay the tax doesn’t mean you shouldn’t file. Choosing to file and resolve compliance problems might be a crucial part of the debt resolution process.

Not all income is current income.

The IRS may take into account whether a taxpayer’s monetary situation is short-lived or likely to persist.

A taxpayer who recently lost his or her job may have little income now. However, if they have a solid employment record, niche skills, good earning potential, or a realistic chance to earn more in the future, their ability to pay may come into question.

When income dips, business owners can be asking themselves the same questions.

The IRS can consider financial trends instead of considering one month that looks good or bad as the “big picture. One of the reasons for the importance of documentation. If a taxpayer argues that income has been reduced for a long period, he or she should be able to provide some reasonable financial data to back up that claim.

The above factors do not act in isolation.

Suppose a taxpayer on the margin of eligibility is liable for $150,000 in taxes.

They have a documented income of $7,000/month and documented household and necessary expenses of $6,800/month. They have significant equity in their home, but also have a significant mortgage. They have filed all returns but have small savings.

A second taxpayer makes $12,000 a month and has relatively small necessary expenses and lots of investment assets, and owes the same $150,000.

Even though they have the same tax debt, they could have different capacity to settle their debt.

This isn’t just about the number on the tax notice – it’s about the financial analysis of the IRS.

The IRS may request financial information via forms and documentation, depending on the collection alternative. Depending on the situation and collection process, taxpayers might see financial statements in the form of Form 433-A or 433-F.

Documentation can include:

• Recent bank statements
• Pay stubs
• Business financial statements
• Mortgage information
• Vehicle loan information
• Investment statements
• Retirement account information
• Proof of expenses
• Asset valuations
• Insurance information
• Tax returns

These depend upon the taxpayer’s situation and what relief is being sought.

There are times when taxpayers make it harder by failing to provide accurate and complete information.

Common problems include:

1. Ignoring IRS Notices

IRS Notices typically include deadlines or instructions. Failure to comply will mean that options are restricted and can result in more intense collection efforts.

2. Providing Inaccurate Expenses

Exaggerating costs or accounting for costs that do not exist can result in loss of trust.

3. Hiding Assets

Not reporting assets can cause significant issues. Financial information is to be full and factual.

4. Certain methods of collection may be suitable for low income, but not all of them will be suitable.
5. Keep on racking up additional tax liabilities.

Resolution can become much more difficult if a taxpayer is seeking relief when they aren’t still adhering to current tax requirements.

If you aren’t able to pay the balance of what you owe the IRS in full, the first step is to create a financial picture.

Consider these steps:

1. Calculate precisely how much additional you owe, including tax, penalties, and interest.
2. Ensure that all necessary tax returns are completed.
3. Determine monthly net earnings.
4. Distinguish between discretionary and necessary expenditures.
5. Include all assets and balances due.
6. Calculate approximate equality of large assets.
7. Analyze if your income is fixed, decreasing, or increasing.
8. Compile financial records.
9. Check out the IRS collection options.
10. Follow through with IRS mail correspondence in a timely manner.

Professional tax advice might be necessary if you have a complicated financial situation, business tax debt, or substantial assets – and the tax situation spans multiple years.

The IRS does not calculate the percentage of tax relief based on the amount of debt. How a taxpayer’s financial situation is assessed may be affected by their income, the amount of necessary expenses, assets, equity, filing compliance, current financial ability, and future earning potential.

There is no one-size-fits-all solution for a specific outcome for all taxpayers. What’s effective for one might not be suitable for another.

The first question to ask is not, “How can I make the IRS reduce my tax debt?” but rather “What does my whole financial picture tell me about my realistic debt repayment capabilities?”

Keeping financial details accurate, up-to-date, and organized, and having an understanding of the collection options at their disposal, can help taxpayers play a more informed game with the IRS.

Does having large tax debt automatically qualify me for tax relief?

No. They evaluate the taxpayer’s financial status concerning income, necessary expenses, assets, net worth, liabilities, and tax return filing. The delinquent tax is a relevant part of the financial situation.

Will the IRS consider future income when evaluating tax relief?

Possibly. They can assess the taxpayer’s current financial capabilities and the possibility of improving the financial situation in the future.

What financial information does the IRS typically review?

The IRS evaluates income, bank accounts, real estate, vehicles, valuable items, investments, retirement savings, expenses, debts, and other sources of income. The taxpayer may be required to submit supporting documentation for the described financial capabilities, e.g., bank statements, income statements, tax returns, tax records, and other documents.