The IRS, when trying to collect unpaid taxes from people, intends to leave them enough to live on. To this end, they have a set of standards for how much income and possessions they won’t steal from you.
This is based on your gross monthly income — meaning that if you’re already more fortunate income-wise, they’ll let you hold on to more (presumably because you’ve become accustomed to a higher-income lifestyle and it would be more of a hardship for you to lose more than it would be for someone not so fortunate). It’s also partially based on your family size and the cost-of-living where you live.
If you are only bringing in enough money to make ends meet, by these standards, the IRS will not try to levy your income. But you might be surprised at just how much that is:
[O]f the $247 billion in unpaid taxes owed as of , $23 billion, or almost 10 percent, is owed by tax debtors IRS has designated as being in financial hardship; therefore, IRS does not attempt to collect their outstanding tax debt. IRS allows tax debtors earning up to $84,000 — almost twice the median income for all households in the United States — to be designated as being in financial hardship. In total, IRS has placed tax debtors collectively owing over $6 billion in tax debt in its top financial hardship income threshold of between $76,000 and $84,000. Because they have been designated by IRS as being in financial hardship, although they are earning relatively high incomes, these tax debtors are excluded from the FPLP and do not face other tax collection action from IRS. , IRS almost tripled the maximum amount it allows tax debtors to earn before being subject to collection action, far above the rate of inflation. IRS could not provide us any data analysis that supported those increases. As a result of those large increases, almost two-thirds of all tax debt IRS has designated as being in financial hardship is owed by tax debtors IRS allows to earn more than the national median household income before their unpaid tax debt again becomes subject to IRS collection action. In contrast, in , no tax debtor with a financial hardship designation was allowed to earn more than the median household income without becoming subject to collection action.
The effect of IRS’s collection policy regarding financial hardship tax debtors who accumulate new debt is essentially to both cease collection of old debt and not require tax debtors to pay the current taxes they owe. Allowing such tax debtors to continually not pay current taxes without consequence appears to be giving tax debtors with financial hardship designations an additional exemption from paying current taxes as well as old tax debt and may contribute to the noncompliance of other taxpayers.
[E]ach tax debtor who is allowed to avoid filing required tax returns or paying current taxes, or who is perceived to live well while facing little tax collection consequence, represents not only less money for vital federal programs but one more advertisement for others to do the same.
These quotes come from a new GAO report: Procedural Changes Could Enhance Tax Collections.