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In contrast to necessary expenses, “conditional expenses”
are those expenditures that do not meet the necessary expense
test. IRM pt. 5.15.1.7(6) (2004). In general, the IRS expects a
taxpayer to pay toward his liability the difference between his
gross income and his necessary, allowable expenses. The
Secretary instructs that installment agreements will be based on
a taxpayer’s maximum ability to pay; “i.e., how quickly a
taxpayer can fully pay the tax liability.” IRM pt. 5.15.1.2(6)
(2004).
However, the “Five Year Rule” of IRM pt. 5.15.1.2(5) (2004),
provides that excessive necessary and conditional expenses may be
allowed if the expenses are reasonable and the tax liability,
including projected accruals, will be fully paid within 5 years.
Necessary expenses above the national and local standards are
“excessive necessary” expenses. This flexibility is limited,
however, to cases where the taxpayer will fully pay his liability
within 5 years.7
7 Given that the 60-month reasonable collection potentials
calculated by the OIC examiner and by the AO both substantially
exceed petitioner’s aggregate tax liability, it appears that a 5-
year installment plan may permit petitioner to make some payments
toward his credit card debt. Excluding interest and penalties,
the monthly installment amount required to pay the aggregate
liability reflected on the notice of Federal tax lien filing in
full over 5 years is $475. The installment agreement mailed to
petitioner after the face-to-face hearing specified an initial
monthly installment payment of $800. Both amounts are
substantially smaller than petitioner’s income available to pay
taxes as determined by the OIC examiner ($1,319) and the AO
(continued...)
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Last modified: March 27, 2008