The Three Year Rule
If the taxpayer has established entitlement to conditional expenses by demonstrating that he/she can remain current and fully pay the outstanding liability within three years, all expenses may be allowed. This is the three year rule for full payment. However, IRM §5323.441 advises that, although three years are allowed, agreements should always be based on the taxpayer’s maximum ability to pay. Therefore, the three year rule is a maximum, not automatic, term for an installment payment agreement. Lastly, if the taxpayer incurred excessive necessary and not allowable conditional expenses after the assessment of the tax liability, these expenses are not covered by the three year rule.
Bluestein & Muhlbauer, P.C.
333 International Drive
Williamsville, NY 14221
716.633.3200
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