What are My Allowable Expenses if I Owe Money to the IRS?

Posted on August 15, 2018

If you owe money to the IRS, there are several programs that may be available to you to resolve your IRS problem.  There are different types of installment agreements, namely streamlined and non-streamlined or regular installment agreements, depending on how much money you owe to the IRS and your ability to pay.  

In addition to installment agreements, a taxpayer may also be eligible to be deemed as temporarily uncollectible, to be in a partial payment installment agreement, to obtain an Offer in Compromise where you settle for pennies on the dollar and penalty abatement, if appropriate.  

If you are not eligible for an Offer in Compromise or a streamlined installment agreement, you may be eligible for a regular installment agreement.  However, in this instance, you must fill out a Form 433, Financial Statement, and provide your income, expenses and assets to the IRS.

In determining your allowable living expenses, the IRS utilizes Collection Financial Standards which dictate the allowable amounts you are permitted to spend in certain categories such as food and clothing, healthcare expenses, housing and utilities and transportation expenses.  Some of the standards are National Standards that apply nationwide, such as food and clothing and health care expenses. Some of the standards are Local Standards, which vary by location, such as the amount of monthly housing and utilities expenses and transportation. The IRS will allow you to claim the amount that you actually spend on these categories up to the amount of the National Standards or Local Standards, whichever is less.  

For example, IRS National Standards for food, clothing and other items is currently $647.00 for one taxpayer, $1,202.00 for two taxpayers, $1,384.00 for three taxpayers, $1,694.00 for four taxpayers and $357.00 for each additional taxpayer.  Taxpayers do not need to prove the amount that they are spending in this category. For health care, the taxpayer is allowed to claim the amount they pay for health insurance plus reasonable out-of-pocket expenses such as prescription drugs, medical supplies, eye glasses and contact lenses.  Housing and utilities expenses include mortgage or rent, property taxes, interest, insurance, maintenance, repairs, gas, electric, water, heating oil, garbage collection, residential telephone and cell phone service, cable television and internet service.

For example, a family of four in DuPage County, Illinois is allowed $2,715.00 per month for housing and utilities, and a family of four in Cook County, Illinois is allowed $2,483.00 per month for housing and utilities.  Transportation expenses consist of two components, namely ownership costs or lease payments for a vehicle. The second component is operating costs which include maintenance, repairs, insurance, fuel, registration, licenses, inspections and parking and tolls.  Generally, only one automobile is allowed per person, so your Sunday fun-day car in the garage is not an allowable expense. In the Chicagoland area, the maximum ownership or lease cost is $497.00 per month, and the maximum operating expense is $229.00 per month per vehicle.  If you own a car but have no car payment, the IRS only allows the operating costs. If you do not own a car, you are allowed an expense for public transportation and do not have to prove the amount that you spend.

The IRS may permit you to exceed expenses in certain categories if it is necessary to cover a taxpayer’s basic living expenses.  For example, we have persuaded the IRS to allow an increased cost for housing because our taxpayer was disabled, could not go up or down stairs and had to pay for a more expensive ranch house to accommodate the size of his family.  Similarly, we have also persuaded the IRS to grant a larger ownership cost for a vehicle because our client required a van that had a wheelchair lift in it. The IRS also allows for the payment of living expenses that exceed the financial standards as long as the tax liability, including penalties and interest, can be paid in full within six years.  Do you owe money to the IRS? Call us, we can help.

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