In determining whether you can repay a delinquent tax liability, the IRS uses its own expense allowances to arrive at your cash flow. Just because you have the expense does not mean the IRS will allow it.
In most cases, your housing/utilities and auto operating expenses will exceed IRS guidelines. Credit card payments are rarely allowed. This results in the IRS requesting payments you cannot afford to make.
There are EXCEPTIONS if you have expenses that exceed IRS allowances.
If the liability can be repaid within five years, the IRS has discretion to allow all expenses.
The IRS will also allow up to one year to eliminate the unallowable expenses, but in most situations this is usually quite difficult to accomplish. How do you suddenly retire that credit card debt in 12 months?
These expense allowances are at the heart of every IRS collection case – the value of an offer in compromise, the amount of an installment agreement, or whether your debt is uncollectible.
Here is an overview of what the IRS will allow (click on the highlighted area for the IRS monthly household living expense allowances):
Food, housekeeping supplies, clothing, personal care products. This is good news – the IRS will give you their allowance even if you spend less – you do not have to prove it. You will, however, have to show unusual circumstances to get more (i.e, specialized diet).
Mortgage, rent, real estate taxes, insurance, maintenance, gas, electric, water, trash, sewer, heating oil, telephone and cellular phone. These allowances are localized – someone living in Los Angeles County will be allowed more housing and utility costs than than if they were living in Hamilton County, Ohio. It is based on the number of dependents in your household. In most cases, the IRS allowances are not enough to cover actual living expenses. Extenuating circumstances must be present for the IRS to allow more.
Auto payment and operating expenses. You are allowed a car payment not to exceed $489/month; if your payment is less than $489, then what is paid is what is allowed.
Operating expenses (gas, insurance, tags, maintenance) for your car is based on local allowances – if you live in Cleveland, for example, the IRS will allow $186/month per car; if you live in Dallas, the IRS will allow $228/month per car – usually short of reality. Operating expenses have to be proven if you claim an entitlement to more than the allowances, which is most often the case.
Medical expenses. The IRS will allow health insurance premiums – no limitations provided it is necessary. Medical out of pockets – prescriptions, copays, etc. – are allowed at $60/month per dependent under age 65, $144/month for those over 65. If you spend more than that, you must prove it.
Other expenses, including credit card payments and charitable contributions, are usually not allowed, while child support and student loans usually are. In most cases, the credit card payments would have to be necessary for the health and welfare of your family (hard to prove) or for your business.
Yes, the IRS wants the credit card money, and so does the credit card companies – who gets the pie?
The dilemma over your reality vs. the IRS expense allowances often forces a Chapter 7 or Chapter 13 bankruptcy reorganization, using federal bankruptcy law to determine payment priorities, not IRS guidelines. This often results in paying less on the credit cards and less to the IRS.
IRS financial statements should be prepared only with a full understanding of how to work though the IRS expense guidelines. It is important to capture all allowable expenses – like arguing for an allowance to replace a 10 year old truck with no car payment when one is necessary.