One of the most common misconceptions in tax resolution is that the IRS bases payment decisions solely on income. Many taxpayers assume that if their paycheck is modest, the IRS will automatically agree to low payments or hardship status.
In reality, income is only one piece of the picture. The IRS uses a detailed financial analysis to determine what it believes you can afford, and that analysis often surprises people.
Understanding how the IRS evaluates ability to pay can make the difference between a manageable resolution and an unaffordable one.
The IRS Uses a Financial Snapshot, Not Just Pay Stubs
When the IRS evaluates your case, it looks at a broad financial snapshot. This includes assets, expenses, household size, bank balances, and even spending patterns.
The IRS applies standardized guidelines, known as Collection Financial Standards, to determine what expenses it considers “allowable.” These standards often differ from real-world costs.
What you actually spend and what the IRS allows are not always the same.
Why Expenses Matter as Much as Income
Many taxpayers are surprised to learn that the IRS may disallow certain expenses, even if they are legitimate. This can artificially inflate what the IRS believes you can afford to pay.
Housing, transportation, food, and healthcare costs are often capped by IRS standards. If your actual expenses exceed those limits, the IRS may still calculate your ability to pay based on lower amounts.
This is why documentation and presentation matter.
Assets Can Change the Entire Calculation
The IRS also considers assets, including bank accounts, retirement funds, vehicles, and property. Even assets you do not plan to sell can affect how the IRS views your financial capacity.
In some cases, the IRS may expect asset liquidation or borrowing against assets before agreeing to certain resolution options.
Failing to account for assets properly can limit available solutions.
How the IRS Decides What You Can Pay
| Factor | What the IRS Reviews | Why It Matters |
|---|---|---|
| Income | Wages, self-employment, household income | Sets baseline payment expectations |
| Living expenses | Housing, food, transportation, healthcare | Compared against IRS allowable standards |
| Assets | Bank accounts, vehicles, property, retirement | May be viewed as available resources |
| Household size | Dependents and shared income | Affects allowable expense thresholds |
| Compliance status | Filed returns and current payments | Impacts eligibility for relief options |
| Financial documentation | Accuracy and completeness | Determines credibility and flexibility |
Why DIY Financial Disclosures Can Hurt You
Many taxpayers complete IRS financial forms without realizing how their answers will be interpreted. Small mistakes, inconsistent numbers, or missing documentation can lead the IRS to assume higher ability to pay.
Once those assumptions are made, reversing them can be difficult. Professional guidance helps ensure financial information is presented accurately and strategically.
How BPB Tax Resolutions Approaches Ability-to-Pay Cases
BPB Tax Resolutions evaluates IRS financial standards alongside real-world circumstances to determine the most realistic resolution path. The goal is to protect clients from unaffordable payment demands while remaining compliant and credible with the IRS.
By managing documentation, communication, and negotiation, BPB works to secure outcomes that reflect actual financial capacity rather than rigid formulas.
If the IRS is asking for financial information or demanding payments that do not seem realistic, understanding how they calculate ability to pay is essential. Speaking with a tax resolution professional can help you avoid costly mistakes and pursue options that fit your situation. Call BPB Tax Resolutions today to schedule a consultation and get clear guidance on how the IRS evaluates what you can afford.
