IRS Allowable Living Expenses – Other Expenses the IRS Considers Necessary
Outside of these basic necessary expense categories, the IRS will also factor 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 to produce 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 that 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 exceed the standard.
We 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, we are often forced to manage expectations of the 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 IRS 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.
Tracking Your Allowable Living Expenses for the IRS
Having the IRS nosing through your living expenses can seem like a major intrusion, but if you want to have your offer in compromise approved, then you have to play the game.
It is no fun, but just keep your end goal in mind — getting your offer in compromise or other repayment proposal approved.
The IRS is trying to be as fair as possible in determining a taxpayer’s reasonable living expenses and that is why they developed standards on the national and regional levels. It gives them a benchmark against which to compare your living expenses to assess how much you will be able to pay towards your IRS debt.
If you want to submit an offer in compromise or other repayment request to the IRS, I encourage you to reach out to me. I have negotiated successful OICs and other repayment requests for other clients.
I am very familiar with the standards and can help you prepare your documentation so that the IRS will accept your offer as well as leave you with enough money to live comfortably on.