How Does an IRS Payment Plan Work?

So an IRS payment plan and negotiating one is both an art and a science. Let's talk about the science side of things. So IRS payment plans start based on a formula and the formula looks at the available assets that a taxpayer has and the IRS determines whether the taxpayer could full pay or substantially pay the liability based on the value of those assets. So for example if you owe the government $50,000 and you have $50,000 sitting in your bank account, the IRS is going to want that absent some good reason. So they go through your expenses, they look at your house, in certain cases they look at the equity in your house, can you borrow against any assets, things like that. If they determine that you don't have sufficient equity in your assets, then it becomes an income and expense analysis they look at your various sources of income they usually average it over a three-month period and then they'll look at your ordinary and necessary living expenses. So the real kicker with this is the term ordinary and necessary. The IRS has standards and they're based on both national standards and local living standards on how much things should cost. So like for example, with your housing the IRS has an average based on where you live of how much housing is in your area. If you go to.

the IRS website and look up IRS housing standard, the number is probably not very much to your liking but the IRS comes up with these standards and then that's what they consider to be your ordinary and necessary living expenses. So they take your income, they take your ordinary and necessary living expenses, and then that's how they negotiate a payment. The way they calculate this is through an IRS financial standard. So they'll ask you to fill out a 433 F or 433 a or if you are a business they're going to ask you to fill out a 433 B. That financial statement is essentially a list of all of your assets. It's a list of all your sources of income, all your available lines of credit and all your expenses and so they take that information and they call it together and they come up with a determination based on that form. And the reason that there's an art to this is we're moving ourselves through the science. This is a fluid negotiating process so the numbers that are listed on the 433 a can change and by understanding the variances and what the IRS is looking for and how the procedure works, there's sort of an art to negotiating payment plans with smaller liabilities. There's not much art to it, it's mostly science but if your liabilities are seven fifty or a hundred or million, or you know a hundred thousand dollars a million dollars, those are liabilities that require a little bit more.


Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law