In order to qualify for an IRS settlement or IRS payment plan in certain cases the IRS not only looks at your income and assets, but also your “necessary” monthly living expenses. Of course they do because your income minus your living expenses equals your monthly cash flow. They want to know how much money you have left over to determine what you can offer as a settlement or monthly payment.
The success of your IRS tax settlement or “offer in compromise”really turns on having full knowledge of the IRS investigative standards and how they evaluate income, assets and living expenses. This article will focus in on how the IRS calculates living expenses.
The IRS has developed a set of necessary expense guidelines called the Collection Financial Standards found on the IRS website. These standards cover national expense standards for food and clothing, local expense standards for housing and utilities, local and national expense standards for transportation and national expense standards for out-of-pocket health care.
For food and clothing and out-of-pocket health care expenses, the standard amount allowed is not questioned and no verification of actual spending is needed. For housing and utilities and transportation, as a general rule, the collection financial standards are followed. This is true unless your actual expense is lower, or if higher, you can prove the expense is necessary for the health, welfare or production of income. It is important to note that expenses you are supposed to paying, but are not, will not be counted as an allowable housing and utility expense.
In determining how much you can pay, the IRS allows necessary living expenses for a taxpayer and his or her family. Generally, the total number of people in the household needs to be reflected as exemptions on your most recent tax return for them to be allowable.
National standard for food and clothing
The IRS standards for this category includes a table based on number of persons in the household, and as stated before, is allowed without verification of actual expenses. This table includes five necessary expenses: food, housekeeping supplies, apparel and services, personal care products and services, and miscellaneous.
Local standards for housing and utilities
The IRS breaks this category down into the following: mortgage or rent, property taxes, interest, maintenance and repair, insurance and utilities (gas, electricity, water, heating oil, garbage collection, cable, internet/telephone/cell phone). To calculate your allowable amount, go to the IRS schedule which will show a breakdown of each state and separate county for each state.
National and local standards for Transportation
These standards come in two parts: ownership costs consisting of a monthly car payment or lease payment and operating costs which are broken down into a table by region. These costs may be taken for up to two cars, however, a single taxpayer can expense only one car.
In the case of ownership/lease monthly payments, you may take only the “actual” payment amount. If you have no monthly payment, no amount may be taken. Operating costs include fuel, registration, licensing, repairs/maintenance, insurance, inspections, parking and tolls which are capped at the allowable amount, unless more is needed due to necessity. Any additional operating expenses must be verified. Both ownership and operating costs for a second vehicle are the same as for the first automobile.
For older cars, the IRS allows more in operating expenses. According to the Internal Revenue Manual 126.96.36.199.3, you are allowed $200 more a month for each vehicle over six years old or over 75,000 miles if you do not have a car payment.
The IRS allows a single nationwide allowance for public transportation, such as for bus, train and taxi travel. This amount may be taken per household without verification of the “actual” amount spent if you have no vehicle. If a taxpayer has both a vehicle and uses public transportation, expenses may be allowed for both, provided they are needed for the health, and welfare of the taxpayer or family, or for the production of income.
National standards for out-of-pocket health care expenses
These types of expenses include out of pocket for insurance, doctors, prescriptions, dental and optical (glasses, contacts) and other medical. If you are paying these costs, there is no limit, however you must collect all proof/substantiation for them.
Also, there is a minimum allowance allowed of $60 per person for out-of-pocket. Taxpayers 65 or older have a higher minimum. No verification is needed for the minimum allowance.
Other allowable expenses
Other expenses allowed which are not reflected in the collection financial standards, but are considered necessary include: court ordered payments (child support, judgments), current taxes paid, installment agreements for other taxing entities, term life insurance (to a certain extent) and student loan payments.
There are many factors that go into resolving your tax problems with the IRS. The collection financial standards are just one. Arming yourself with knowledge of these allowable expenses will assist you in settling your IRS tax debt or getting you on an affordable payment plan in some cases.
For further information or help with your specific situation, call Delia Law Tax Law Firm at (619) 639-3336 or request a free tax consultation.