IRS will consider student loans/state taxes into ability-to-pay analysis

IRS will consider student loans/state taxes into ability-to-pay analysis

The IRS has released guidance that clarifies and revises its procedures under which agents analyze a taxpayer's ability to pay its tax liability. The guidance now instructs agents to consider payments on student loans and delinquent state and local income tax liabilities when determining whether a taxpayer is able to pay what it owes to the government.

The guidance provides that generally minimum payments on student loans guaranteed by the federal government will be allowed for a taxpayer's post-high school education. Additionally, the IRS may take into account monthly payments on delinquent state and local taxes for certain taxpayers.

Financial analysis

When the IRS determines that a taxpayer owes a certain amount of money to the federal government, the collection agent will generally consider one or several courses of action to obtain it. These may include requesting payment in full or in part out of the taxpayer's available assets, filing a lien, entering into an installment agreement to pay back the liability in a series of payments, or making an offer in compromise to settle the liability for less than what is owed. While the IRS decides which action to take, the collection agent is directed by the Internal Revenue Manual to conduct a financial analysis of the taxpayer's financial condition.

Student loans

To allow minimum payments on student loans, taxpayers must verify that their student loans are guaranteed by the federal government and must substantiate that payments are being made. Taxpayers who have not yet made arrangements to repay their loans have 10 days to set up a payment plan and provide verification. Additional time may be granted for extenuating circumstances. Otherwise an installment agreement generally will be established without allowing for loan payments.

State and local taxes

In certain circumstances monthly payments on delinquent federal and state or local taxes may be allowed for purposes of determining a taxpayer's ability to pay. These include:

When a taxpayer owes both delinquent federal taxes and delinquent state or local taxes and does not have the ability to full pay the liability;
When a taxpayer is cooperative and provides complete financial information; and
When a taxpayer provides verification of the state or local tax liability and agreement, if applicable.
Allowing payments for delinquent state or local taxes for an installment agreement will have no effect on lien or levy priorities, the guidance memorandum warns. IRS agents therefore are instructed "to apply existing procedures and lien law to determine the IRS interest in assets."