The Internal Revenue Service (IRS) takes the collections process seriously. Individuals who owe money to the IRS should expect the agency to pursue these funds in a variety of ways. However, the IRS is not permitted to collect assets that the taxpayer needs to maintain a basic standard of living. IRS Allowable Living Expenses are excluded from the calculations that the IRS conducts to determine the reasonable collection potential of taxes. Regardless of the size of the tax liability, the IRS must allow the taxpayer to keep enough funds to pay for these allowable living expenses.
If you have a significant IRS tax liability and have questions related to allowable living expenses or another aspect of the collection process, it may be worth discussing your case with an experienced IRS tax lawyer. An attorney with experience in IRS negotiations may help their clients calculate an accurate allowable living expenses figure that allows them to more easily pay off their tax liability. At Damiens Law, our team of Mississippi tax lawyers can provide legal guidance and help you work towards a resolution of your current tax liability. Contact us today at (601) 957-9672 to learn more about your legal options.
How does the IRS define IRS allowable living expenses?
The IRS calculates whether an expense meets the criteria of an allowable living expense by implementing the necessary expense test. According to the IRS Collection Financial Standards, the necessary expense test determines whether an expense is necessary for the health and welfare of the taxpayer (and their family), and/or their income. Expenses that pass this test may be classified as allowable living expenses.
National vs. local standards
Some of the basic living expenses are bound by National Standards, while others are defined according to Local Standards. These standards set a dollar amount for each expense that falls under the IRS definition of an allowable living expense.
National standards for allowable living expenses
The National Standards apply to the following types of allowable expenses:
- Food, clothing, and personal care – These amounts are based on the number of people in the family: individuals have a budget of $637 per month; two-person households have $1,202 per month; three-person households have $1,384 per month; families of four have $1,694 per month. The IRS allows $357 for each additional family member over four.
- Out-of-pocket health care expenses – According to the IRS out-of-pocket health care standards, each member of a household who is under age 65 can have up to $68 per month included in the allowable living expenses. For individuals over 65, $142 of expenses per month can be included as allowable.
- Miscellaneous – Other expenses not listed in the allowable living expense category.
The IRS calculates National Standards for food, clothing, and other items based on data from the Bureau of Labor Statistics Consumer Expenditure Survey, which collects information on the buying habits, income, and household characteristics of American families and households. Health care allowances are derived from Medical Expenditure Panel Survey data and based on the average amount per person for taxpayers and dependents under 65, along with seniors who are over age 65.
Allowable living expense local standards
The Local Standards apply to two main categories of living expenses: transportation, and housing and utilities. Each of these categories has its own set of designated Local Standards.
Housing and utility standards
Housing and utility standards are based on data from the United States Census Bureau, America Community Survey, and BLS data. This data is provided at the state and county level. The amounts for each utility are based on the size of the family and where they live. Housing and utility standards include the following types of expenses:
- Mortgages and rent
- Property taxes
- Homeowner’s or renter’s insurance
- Home maintenance and repairs
- Gas, electric, and water bills
- Heating oil
- Garbage collection
- Home telephone lines
- Cell phone service
- Cable television
The costs for these figures vary significantly depending on the city and state where the taxpayer lives, which is why the IRS has applied Local Standards. If you are concerned about accurately calculating your allowable living expenses in the area where you live, an experienced local tax attorney may be able to provide legal guidance.
Transportation standards are also broken into two categories. Nationwide figures apply to the cost of monthly loans or lease payments, which are deemed ownership costs. However, even though this portion of the transportation standard applies on a national level, the IRS still considers it part of the Local Standards. A car payment up to $497 per month can be included in allowable living expenses, but the IRS usually challenges higher payments.
Monthly operation costs are designated based on data from the Census Region and Metropolitan Statistical Area. These operating costs include insurance, fuel, repairs, maintenance, licenses, registrations, inspections, tolls, and parking – all of which can vary based on location.
Other possible necessary expenses
Occasionally, the IRS will allow other types of expenses to be classified as allowable living expenses based on the unique situation of the taxpayer. In most cases, federal income tax payments, court-ordered payments, and secured debts are deemed as necessary expenses. Other live expenses that the IRS may deem necessary and allowable could include:
- Fees for lawyers and accountants
- Charitable donation deductions
- Childcare costs
- Educational expenses (college tuition often does not qualify)
- Involuntary work-related deductions (such as union dues or job uniforms)
- Life insurance payments
- Secured debts
- Credit card debts accrued for basic living expenses
- Unpaid state and local taxes
- Student loan payments
- Income-producing expenses, such as employee wages and other business expenses
Taxpayers who have questions related to IRS allowable living expenses can learn more by contacting the Mississippi IRS tax lawyers of Damiens Law for a free consultation.
The role of allowable living expenses in payment agreements
Allowable living expenses are often a major factor in negotiating tax debt repayment agreements with the IRS – especially offers in compromise. An offer in compromise is an agreement between the taxpayer and IRS that allows the taxpayer to settle their tax debt for less than the owed amount. The IRS will typically agree to an offer in compromise if they believe they will not be able to collect the full debt of the taxpayer.
The IRS conducts a variety of calculations to determine what they deem to be a reasonable offer in compromise amount. They assess a fair market value to each of the taxpayer’s assets and then subtract other relevant figures from the overall value of their assets. This evaluation will also often consider allowable living expenses when determining how much to subtract from the original tax debt.
Documenting allowable living expenses
While a heavy IRS tax debt may be stressful, the agency is generally willing to work with taxpayers who they believe cannot realistically pay back the full debt. However, thorough documentation is key for those who are looking to have their IRS tax burden reduced or to reach an agreement for an installment plan. Taxpayers who are attempting to reach these types of agreements with the IRS should document their living expenses in as much detail as possible, providing sufficient evidence for the IRS to lessen the tax burden. Otherwise, the IRS may fill in some gaps and arrive at a figure that does not accurately reflect the taxpayer’s necessary expenses.
The national and local standards for IRS allowable living expenses have been meticulously calculated in order to give taxpayers an opportunity to recover from insurmountable tax debts. Negotiating an offer in compromise, installment plan, or another form of repayment agreement can often benefit both the taxpayer and the IRS. The IRS will attempt to arrive at a figure that represents the most they can expect to collect. In some cases, this can result in a drastic reduction of the tax debt while also allowing the IRS to collect the maximum amount that can be reasonably expected. For most taxpayers, providing detailed documentation will be one of the most important parts of the negotiation process.
IRS tax liability guidance from an experienced Mississippi tax lawyer
Taxpayers who believe they will not be able to repay a tax debt after accounting for their necessary living expenses may have options to reach a more realistic agreement with the IRS. However, the process of reaching such an agreement can often be extremely complicated. The IRS will want to see detailed documentation of living expenses and will do their own analysis of the taxpayer’s lifestyle to determine which of these expenses can be deemed IRS allowable living expenses.
This is only one part of the process, as IRS agents will likely evaluate the taxpayer’s assets and virtually all other aspects of their financial and tax situation. For some taxpayers in this situation, an experienced Mississippi IRS tax lawyer may be useful during the negotiation process. An attorney can draw on their experience and knowledge of tax law to reach agreements that benefit the taxpayer and fulfill the requirements of the IRS.