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You have the right to representation by an Enrolled Agent (EA), CPA or Attorney.
You don't have to face the Internal Revenue Service alone, or at all!
Based on Collection Financial Standards the government has set, you may be able to obtain an Installment Agreement to pay your back taxes over time. These standards are not considered to be fair by the Professional Tax Community, but we must work within the parameters until change can be brought about by Congress. However, the savvy taxpayer and/or Tax Professional can help to ease the burden.
The Internal Revenue Service is intent to collect your back taxes (and the penalty and interest that accrues) within 6 yrs, or less. The Collection Statutes last as long as 10 years from the date the tax is assessed on IRS systems. There are some events that can extend that statute, such as a bankruptcy or filing an Offer in Compromise.
If you don't have a prior tax delinquency history you may request one of two types of a Streamlined Installment Agreement
If you owe less than $25,000 and can propose to pay it off within 6 yrs. Minimal financial data is required. No tax lien will be filed.
If you owe $25,000 and less than $50,000 you can get an installment agreement that requires a small amount of financial disclosure and the tax debt must be paid off within 6 yrs. This agreement will require payment by payroll deduction or direct debit from your bank account. Tax liens may or may not be filed.
Otherwise you will need to request a Standard Installment Agreement and provide full financial disclosure.
To request an installment agreement prepare and submit Form 9465 (you will need Adobe Acrobat to open this file). You may also need to complete Form 433-F, a short form financial statement.
The Internal Revenue Service may require a complete financial disclosure from you through the completion of Form 433-A.
Basically the Internal Revenue Service has established what they consider to be reasonable and allowable living expenses, based on Bureau of Labor Statistics (BLS). The Collection Financial Standards. The bankruptcy courts use these same standards. For example; in Hennepin County in the State of Minnesota, allowable housing expense is $2,403 for a family of 5 or more (based on 2012 Standards). This amount includes all housing costs: rent/mortgage payment, mortgage interest, property taxes, insurance, utilities, telephone, maintenance, etc. If the housing costs are more than that, it's not allowed in determining what a taxpayer can pay monthly. These Standards usually change each year on Mar 1st.
The Internal Revenue Service has also established standards for 'National Standards' (Housekeeping supplies, apparel and services, personal care products & services, food, and miscellaneous); transportation (vehicle loan or lease payments, and operating costs).
Any other expenses are allowable as long as you can prove they are necessary, not elective or discretionary.
You can find these Collection Financial Standards here.
After subtracting all allowable expenses from your income, whatever is left over each month is what the Internal Revenue Service will demand for a monthly payment. In reality your real expenses will run higher than what the Internal Revenue Service allows. Often there are expenses that come up periodically that are difficult to predict, or don't even come to mind.
What if you can't pay what the Internal Revenue Service demands?
You have the right to request 1 year to reorganize your finances before beginning payments at the level the Internal Revenue Service wants. You will be required to make some payments in the mean time. The Graduated Installment Agreement. The 1 year gives you time to sell a home that is too expensive (for Internal Revenue Service standards) and obtain cheaper housing. Or to make other adjustments like finding cheaper transportation.
If you find yourself in this situation, get professional help.
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