Continued from IRS Allowable Living Expenses - Part One
Remaining IRS Allowable Living Expense Categories
The remaining expense categories (Housing, Transportation – Ownership, Transportation – Operating) are set by IRS local standards, which are based on the part of the country that the taxpayer lives in. Think about it from the IRS perspective. Taxpayers who live in Tupelo, Mississippi will likely spend less on their monthly housing than those who live in New York City. Likewise, transportation costs would be higher in Los Angeles than in other parts of the country.
As such, these expenses increase or decrease based on the county that the taxpayer resides in. Unlike national expenses, however, the IRS will examine the taxpayer’s actual amount spent on these categories and take whatever amount is lower between the actual amount spent and the standard. However, some IRS collections personnel will just take the local standard amount if the taxpayer requests it without requesting verification of the expense. IRS protocol dictates that collections agent verify these amounts though.
IRS Allowable Living Expenses - Other Expenses the IRS Considers Necessary
Outside of these basic necessary expense categories, the IRS will also take other “necessary expenses” into their collection equation. Federal income taxes are considered a necessary expense as are court ordered payments and the vast majority of secured debts. Here is a quick list of some of the expenses that the IRS considers reasonable in certain circumstances:
- Accounting and legal fees
- Charitable deductions
- Childcare, especially when both parents work
- Court ordered payments
- Educational expenses (Note: College tuition is generally not considered necessary).
- Involuntary deductions (uniforms for a job, dues, etc.)
- Life insurance
- Secured or legally perfected debts
- Credit cards (for the portion of the debt that was for basic living expenses)
- Some other unsecured debts
- Current year taxes
- Delinquent state and local taxes
- Telephone service
- Student loans
- Repayment loans made for purpose of paying federal taxes
Likewise, expenses that are needed for the production of income such as wages to employees, materials, and other business expenses will also likely be considered allowable. The IRS will rarely challenge expenses listed for a taxpayer’s business unless they appear to be facially unreasonable.
IRS Allowable Living Expenses - Other Expenses/Items the IRS May Disallow
On the other hand, expenses that exceed the national/local standards are presumed disallowed absent significant necessity shown on the part of the taxpayer. From a practical perspective, if the expense that you want to claim does not appear on the above list, if you are claiming more than the allowable standard, or if you cannot demonstrate that it is necessary to your production of income, then you are going to fight an uphill battle with the IRS to get it approved. The purpose of having the collection standards in the first place is to provide a uniform and fair system for all collection accounts to be judged equally.
The IRS generally does not deviate from these rules, absent good cause. One general exception to this is if your out of pocket medical costs exceeds the standard. I have found in practice that the IRS usually will not fight you too much on the reasonableness of a medical expense, provided the expense is not outrageous and you can document the medical reason for the expense claimed and/or show substantiation of the expense.
In some instances, the taxpayer may be allowed conditional expenses for a period of time while working with collections. These are on a case-by-case basis and up to the discretion of the collections representative that you are working with. For example, a taxpayer who has a mortgage amount higher than the local standard for housing may be allowed that expense for a period of time (usually provided they are in the process of liquidating that house to satisfy their tax liability or to lower their monthly housing expense).
Unfortunately, as mentioned earlier, college tuition expenses for a dependent are roundly not considered allowable expenses by collections personnel. As such, I am often forced to manage expectations of my IRS collections clients when asked their two most common questions: can I keep my house and can I continue to send my kids to college? The short answer from the IRS is often no (although we practitioners would not be doing our job if we always took that answer).
There is a seemingly difficult line drawn by the IRS when it comes to allowable expenses. Many have criticized the Service for what appears to be hard and fast rules regarding the expense categories and “allowable expenses” which are not actually reflective of a taxpayer’s financial position. However, there are no serious proposals on the table to change the collections financial calculations and taxpayers are going to have to do the best they can with the current system.
IRS Allowable Living Expenses - Conclusion
For many taxpayers, filling out a collection financial information statement can seem like a daunting task. I hope that the information contained in this article will help alleviate some of the difficulty associated with these financial statements. However, I also would encourage taxpayers to seek help from a qualified tax professional when the going gets tough. IRS collections can sometimes be difficult to deal with and rarely give taxpayers the benefit of the doubt when it comes to collection matters. It is important to achieve a resolution that will help satisfy any pending tax liabilities, but it is equally important to have a plan that will be manageable for the taxpayer and will not put them into financial hardship. It is the very goal the IRS was trying to achieve with the Allowable Living Expense Standards.
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 See IRM 22.214.171.124 for a full list and explanation: http://www.irs.gov/irm/part5/irm_05-015-001.html#d0e1470