When a tax debtor is unable to meet his or her tax obligations, or more specifically, where the tax debtor’s attempt to meet those obligations would result in an untenable financial situation, the IRS is willing to make alternative arrangements. These arrangements include offers in compromise, whereby the tax liability owed by the tax debtor is reduced, as well as installment agreements and partial payment installment agreements. However, in order to allow tax debtor’s to avail themselves of these remedies, the IRS must make a determination as to whether the tax debtor will in fact experience financial hardship, and at what point that hardship will occur. The IRS does this in order to find the largest possible monthly installment or payment that the tax debtor can pay without finding him or herself in financially dire straits.
For this reason, the IRS has developed allowable living expenses standards, which are employed to determine a viable payment for the tax debtor. Allowable living expenses are made up of three kinds of expenses: national and local standards, other necessary expenses, and conditional expenses. National and local standards are used in order to determine what a taxpayer may claim as basic living expenses necessary to avoid undue hardship. Internal Revenue Service, IRS Updates the Allowable Living Expense Standards for 2012, available at https://www.irs.gov/businesses/small-businesses-self-employed/collection-financial-standards. Yet these standards also provide for consistency and fairness in collection determination process, given that they are based on the average amount that citizens in similar locations tend to spend on their basic necessities.
National standards establish standards for food, clothing and other items and out-of-pocket health care expenses; specifically, food, housekeeping supplies, apparel and services, personal care products and services, and miscellaneous. These standards come from the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey, which are collected and compiled on a national scale. By contrast, local standards establish standards for housing and utilities as well as transportation in recognition of the regional disparities in costs associated with housing and utilities from place to place. Thus, while these local standards are also computed from Bureau of Labor Statistics data, they account for necessary expenses on a regional basis where those expenses vary greatly from region to region. In claiming allowable living expenses as they pertain to local standards, taxpayers will normally be allowed the local standard or the amount that they actually paid per month, whichever is less.
For more questions about national or local standards as they relate to allowable living expense calculations, contact an experienced tax attorney.
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.