How does the IRS determine a taxpayer's ability to pay on delinquent taxes?

For most people, it's a given that taxes need to be paid, and they need to be paid on a timely basis. However, knowing something unfortunately does not equate into consistently being able to do it.
This is certainly true when it comes to the arena of federal tax obligations. Taxpayers, despite their best intentions, find themselves in the toothless position of staring down the wrong end of April 15. For some, owing each year on their taxes, coupled with an inability to pay, puts them in a pyramiding and powerless position.
The IRS, not some third party tax resolution firm, can help you. The IRS has a separate division devoted to the collection of delinquent tax. Yes, their job is to pursue enforcement against willful non-payers, but they are tasked with the primary duty to help you understand why you owe, assist you with a payment agreement, and make certain you do not owe again in the future.
To that end, the IRS uses various expense standards to outline what a taxpayer's payment ability is. Once an individual owes a large sum of money, or if they make clear that they cannot pay anything at all toward even a smaller balance due, in most circumstances, the IRS will ask you a series of questions regarding your income and expenses. This is done to help determine the amount you can pay.
These standards are based on the Bureau of Labor Statistics, which are comprised of data gathered from, among other places, the national census and Consumer Expenditure Surveys. The IRS does not establish these standards.
The following information concerning IRS expense standards can be found at IRS.gov. (Sorry to disappoint, but no secrets being given out here.)
The IRS breaks down expenses into those that are considered necessary, and those that are conditional, or unnecessary. Some expenses could be both, depending on the circumstances. Necessary expenses, by definition, are those that provide for a taxpayer's or their family's health and welfare, or are directly used for the production of income.
Necessary expenses are further categorized into National Standards and Local Standards. National Standards are those expenses that are established for all taxpayers, no matter what state they are in. Local Standards are adjusted, based on your locality.
National Standards
There are three main National Standards: Food, Clothing, Miscellaneous is one. Out-of Pocket Health Care is the other. Transportation Ownership costs is the third.
Food and Clothing
This category of expenses covers a taxpayer's food, both in-house and dining out, clothing, including dry-cleaning, housekeeping supplies such as cleaning, lawn and garden supplies, and all personal care products and services.
The IRS is not going to break down the minutiae of exactly how much a person spends on shampoo, bird seed, bologna, paper towels, etc. Taxpayers are allowed a monthly amount, based on their family size, without questioning the amounts they actually spend. If the amount claimed ismore than the total allowed by the National Standards, the taxpayer must provide documentation to substantiate that the extra expenses are necessary.
As an example, for a family of four, the IRS currently allows $1,377 for the above expenses, per month.
Out-of-Pocket Health Care
The IRS determines out-of-pocket health care expenses based on Medical Expenditure Panel Surveys. Health insurance is not covered under this, since the amount paid varies from family to family and is not governed by a traceable standard.
Out-of-pocket health care expenses include medical services, prescription drugs, and medical supplies such as eye glasses, contact lenses, asthma inhalers, etc. Doctor visits and co-pays are included, as are all current medical bills that you are actually paying on yourself. Elective procedures such as plastic surgery or elective dental work are generally not allowed.
Similar to the Food & Clothing category, taxpayers and their dependents are allowed the standard amount monthly on a per person basis, without questioning the amounts they actually spend. If the amount claimed is more than the total allowed by the health care standards, the taxpayer must provide documentation to substantiate the overage.
As a standard, the IRS allows $60 per person for out-of-pocket medical for each person under 65. For those 65 and older, the amount allocated is $144 per person, whether you spend that much or not.
Transportation Ownership
The IRS outlines amounts for two vehicles. If a taxpayer is married, both he and his spouse are allowed to take a vehicle ownership expense. The IRS currently allows up to $496 per month per vehicle, for a total of $992.
Luxury cars and those with monthly payments over the standards will not be allowed. You will be given the standard only.
Local Standards
Local Standards are broken down into two sub-categories as well: Housing and Utility Expenses, and Transportation Operation Expenses.
Housing and Utilities
The housing and utilities standards change based on your state. The standards vary per county and family size. Expenses are for housing and utilities on a taxpayer's primary place of residence only.
Housing and utility expenses include mortgage or rent, property taxes, homeowners or renters insurance, maintenance, repairs, gas, electric, water, heating oil, garbage collection, telephone and cell phone.
The IRS will allow you the actual amount you spend on these items, up to the maximum allowable local standard as determined by your state and county. Extravagant homes, hefty mortgages and expensive utilities, such as top-tier cable packages, will not be allowed. You will be given the maximum standard. Any excess expense over the Local Standard is not allowed in lieu of your federal tax debt obligation.
Transportation Operation
In addition to Ownership Costs, a taxpayer is allowed Operating Costs, for up to two vehicles, based on regional and metropolitan areas. Operation costs include gas, insurance, parking, tolls, license and registration fees, and general maintenance.
You will be allowed the actual amounts spent, up to the Local Standard amount. If you prove that you must spend more because the expense factors into you or your family's health and welfare or production of income, the excess can generally be allowed.
If you have no lease or car loan payment, the amount allowed for Ownership Costs will be $0. In place of that, you will be allowed an amount of $182 per month for public transportation cost, whether you actually expend that much or not.
As with all the other expenses, if you pay more each month for public transportation, you first must prove it's necessary, and then you must establish you are actually paying it.
Bottom line? The IRS will take a look at your net monthly income, subtract out the above expenses, and then the remainder is the expectation as to what your monthly payment ability is.