Over the last few weeks I’ve given an overview of how the IRS determines how much a taxpayer can afford to pay and how much they (the IRS) will accept to resolve a taxpayer’s outstanding tax liabilities.

Last week’s article, linked here, discusses how the IRS determines what the taxpayer’s “allowable” living expenses will be for this calculation.

My firm, By The Book Taxes, specializes in preparing income tax returns for individuals, married couples and self-employed people. I also help taxpayers resolve their tax problems.

The calculation to determine what a taxpayer can repay and what the IRS will accept is based upon living expenses, assets and income.

The calculation for assets is called “Net Equity in Assets”. Take the value of assets such as your home (if you own it), your car and investment and retirement accounts too.

Assume a “quick sale value” of 80% of the fair market value of each asset. Subtract from that any loans or mortgages you may have against these assets. The result is your “net equity in assets”, or how much you have left after a quick, distressed sale when all loans are paid.

Here is a chart to illustrate the calculation:

           NET EQUITY IN ASSETS    
         
  Fair Mkt. Quick Sale Loan or  
Asset Value Value Mortgage Net Equity
         
Home                425,000          340,000        (295,000)            45,000
Investment Account                175,000          140,000                        –          140,000
Car*                  28,000            22,400              (3,450)            18,950
401k**                475,000          332,500                        –            332,500
Total Assets            1,103,000          834,900        (298,450)          536,450
         
* There is an automatic $3,450 exemption for a vehicle.  
** The QSV of a tax deferred retirement account is 70% assuming the
     taxpayer is under 59 1/2 and has a 10% early withdrawal penalty.

This taxpayer would have $536,450 in net assets that could be sold to pay back his delinquent tax debts. Depending on the level of the tax debt here, I would suggest selling off the investment account and/or withdrawing the 401k, making a large payment to the IRS and then getting on a manageable installment payment agreement.

If you have years of unfiled tax returns, owe a significant (to you) amount of money to the IRS and need someone to help you resolve your tax debts, please call me. I can help.