As tax professionals, we get clients with various types of tax problems. But somehow those with collection issues are some of the most difficult. A common scenario is a client owing a large amount of taxes, say $100,000 in personal income taxes. During the initial meeting, the client says he can reasonable pay between $1500 and $2000 a month. Of course, being the experienced Enrolled Agent, CPA, or Attorney, you want to see his financial documents to see how well his perspective meets with reality. So you guide him on what documents are needed to determine what his monthly payment will be.
You get his bank statements various monthly expenses, pay stubs, and other financial documents. You diligently fill out the appropriate Form 433. Suddenly you see that amount on line 50 of the Form 433A computes $5500 in monthly discretionary income. So he can pay $1500 – $2000 a month. But the problem is that the IRS’ perspective (not necessarily reality) is going to be that he should pay $5500 a month.
Well, before you call and give your client the bad news, you might want to refer to a few legal sources. The first is IRC 6330(c)(3)(c), which states “whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary.” Of course, this is a bit vague and might seem like a difficult argument to make. How is requesting the taxpayer to pay the full amount on the Form 433 overly intrusive?
Well, the second source is the Internal Revenue Manual and specifically section 18.104.22.168.1, which instructs the revenue officer to accept a proposed payment plan that will fully pay the tax debt within 6 years. This is commonly referred to as the six (6) year rule. The six-year rule allows for payment of living expenses that exceed the Collection Financial Standards, and allows for other expenses, such as minimum payments on student loans or credit cards, as long as the tax liability, including penalty and interest, can be full paid in six years. There are some conditions, such as the collection statute shouldn’t be in jeopardy, the taxpayer’s expenses must be reasonable, and this generally only applies to personal income tax debts.
We’d love to hear your experience using the six year rule. Visit the Tax Alliance Conference page for more information and updates.