When the tax debtor is unable to meet his or her financial obligations, the Internal Revenue Service can provide a number of alternatives that will allow the taxpayer to meet those obligations over time. This is also known as an installment agreement, i.e. an agreement between the tax debtor and the IRS that allows the tax debtor to make monthly payments over a period of time that will count toward the outstanding tax liability. While this may seem fairly cut and dry, there are a number of factors that go into the determination as to whether a tax debtor is eligible for an installment agreement and expense categories.
The principal concern of the IRS in choosing to grant or deny an installment agreement is that the tax debtor is able to pay, but simply is attempting to delay payment as long as possible in favor of other expenditures. This is problematic not only because the IRS has a mandate to prioritize its own accounts receivable, but because a tax debtor may very well spend money frivolously that could have been used to meet his or her tax obligations. On the other hand, the IRS is not in the business of taking a tax debtor’s last cent and leaving them unable to pay rent, get to work, pay medical bills, and ultimately afford the basic necessities of life. As a result, the IRS endeavors to find a happy medium between the two, and it does so through the calculation of allowable living expenses.
These expenses can be broken down into three categories: allowable living expenses, other necessary expenses, and other conditional expenses. Internal Revenue Service, Internal Revenue Manual 22.214.171.124 (10-02-2012), available at https://www.irs.gov/irm/part5/irm_05-015-001.html#d0e1470. Allowable living expenses include food, housekeeping supplies, apparel and services, personal care products and services, and other miscellaneous items, the cost of which are calculated based upon national standards. Also included in the allowable living expenses category are the costs of housing and utilities as well as transportation, although these expenses are calculated based upon local standards. As to the latter two categories, expenses that meet the necessary expense test are considered other necessary expenses, whereas those that do not are conditional expenses. That test defines necessary expenses as expenses that are “necessary to provide for a taxpayer’s and his or her family’s health and welfare and/or production of income.”
If you have more questions about the types of expenses considered by the IRS in granting installment agreements, consult an experienced tax attorney to learn more.
Please keep in mind the information and advice presented in this blog is not intended to be used as formal legal advice. Contact a tax professional for personalized tax advice pertaining to your specific situation. While we try and answer all parts of the question when we write our blogs, sometimes there may be some left unanswered. If you have any questions about your problems with the IRS, SBOE, FTB, or BOE, or tax law in general, call RJS Law at (619) 595-1655.