Got IRS Debts? Why You Should Fix Your Student Loans First

IRS tax break

If you have IRS income tax debts, you should consider working out a repayment plans for your Federal student loan debts first.

Fresh Start Initiative

In 2012, the IRS issued another phase of its well-known “Fresh Start Initiative” which, among other things, subordinates the IRS debts to Federal student loan repayments.

In other words, let’s say that a taxpayer has $100,000 of IRS tax debts.  He wants to either settle his tax debts with an Offer in Compromise (“OIC) or perhaps he wants to enter into a Partial Payment Installment Agreement (“PPIA”).   In either of those two programs, the IRS will require the taxpayer to document their net monthly income and allow them to deduct what the IRS considers to be reasonable and necessary expenses.

The IRS Fresh Start Initiative considers Federal student loan repayment amounts to be reasonable and necessary.  So, if you’ve got tax debts, and you also have a student loan problem (for example, a student loan default or forbearance), you would be well-served to work out the student loan problem first.

Student Loan Resolution

How do you do that?  Well, you get yourself out of default, likely by consolidating all of your federal loans into a new Federal loan, and voila, you work out with the educational lender a monthly payment amount.  Perhaps, that could be through the Income-Based Repayment Program.  If you work in the public sector or for a charity, perhaps it’s the Public Service Loan Forgiveness Program.  The main point to remember is that the U.S. Department of Education does make available a variety of repayment options.  Even for someone in student loan default, there should be a way to get out of it.

Moreover, the logic here is that a student loan borrower has to eventually confront his or her Federal student loan debts.  Remember that there is no statute of limitations on federal student loans.  They do not simply go away!!  And the Feds have almost unlimited collections powers with student loans;  they can garnish wages and bank accounts and seize tax refunds.

How can it help the taxpayer with the $100,000 tax debt?  Let’s say that his student loan payment winds up to be $300 monthly.  He attaches the repayment documentation to his IRS Offer in Compromise or Installment Agreement forms.  He can then reduce his Offer by $3,600 (in shorthand, I arrive at $3,600 by multiplying $300 by 12 months).   Or with his Installment Agreement, the IRS would agree to reduce his monthly IRS payment by that same $300 a month.

If you have questions or comments, let me know in the space below!

2 Comments on “Got IRS Debts? Why You Should Fix Your Student Loans First”

  1. I am in the middle of an Offer In Compromise. I listed my student loans which are in the federal freeze due to the pandemic. My IRS case worker won’t allow the figures and states that I have to be paying the loans. I find this very difficult to believe when the IRS handbook states that nonpayment is accepted under circumstances. What are your thoughts?

    1. I didn’t see your comment previously, but can you resume making the student loan payments? You eventually have to pay the student loans anyway, and this is harming your OIC. The IRS does not make Offers in Compromise easy. They are quite difficult and indeed the IRS Manual does state that federal student loans are permitted as an allowable expense when computing your Offer amount, nevertheless, this is an example of how the IRS tries to make things difficult for folks who are going through OIC’s. I would suggest that you simply resume making the student loan payments and that way, you eliminate the argument that the OIC examiner has against you. Good luck.

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