Outside of these basic necessary expense categories, the IRS will also factor other “necessary expenses” into their collection equation. IRS Allowable Living Expenses – Other Expenses the IRS Considers Necessary IRS protocol dictates that collections agents verify these amounts though.
However, some IRS collections personnel will just take the local standard amount if the taxpayer requests it without requesting verification of the expense. Unlike national expenses, however, the IRS will examine the taxpayer’s actual amount spent on these categories and take whatever amount is lower between the actual amount spent and the standard. Likewise, transportation costs would be higher in Los Angeles than in other parts of the country.Īs such, these expenses increase or decrease based on the county that the taxpayer resides in. Taxpayers who live in Tupelo, Mississippi, will likely spend less on their monthly housing than those who live in New York City. The remaining expense categories (Housing, Transportation – Ownership, Transportation – Operating) are set by IRS local standards, which are based on the part of the country that the taxpayer lives in. Remaining IRS Allowable Living Expense Categories Many of the nicer collection agents (and there are plenty of them) will go ahead and give it to you automatically. Therefore, if the amount that you actually spend per month is lower than the IRS national standard, you should indicate to the IRS that you wish for them to use the standards when computing your collection potentials. It is important to note for collection purposes that these amounts are given to you to maintain your basic standard of living whether you exhaust them in a month or not. In addition, healthcare costs also take into consideration how old the particular member of the household is. The allowable expense in these categories depends principally on how many members are living in the household. In these two cases, how much your monthly budget is for food and out-of-pocket healthcare is a fixed number. Within these five categories, two of them (food, healthcare) are governed by set national standards, which are deviations of the statistics compiled by the Bureau of Labor Statistics’ Consumer Expenditure Survey (CES).
How IRS Allowable Living Expenses Are Classifiedįirst, allowable living expenses have been separated into five basic necessities: Other Conditional Expenses – expenses, which may not meet the necessary expense test, but may be allowable based on the circumstances of an individual case.Other Necessary Expenses – expenses that meet the necessary expense test, and are normally allowed.
According to the Internal Revenue Manual (IRM), the necessary expense test is defined 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.” So, what does the IRS consider allowable living expenses? The IRS has developed a test called the necessary expense test to determine whether or not it will allow an expense to be included. The Definition of IRS Allowable Living Expenses As always, if you have any questions after you have read this, give me a call. This will give you a better understanding of the basis of the IRS’ decisions. In this chapter, I have explained how the IRS defines allowable living expenses and provided links to the IRS website which will give you more information. Keep in mind that regardless of the size of the liability, whether $1,000 or $1,000,000, the IRS will always allow the taxpayer to keep enough cash to pay for their allowable living expenses. The IRS calls these “ Allowable Living Expenses” and they are excluded from the calculation that collection agents use to determine a taxpayer’s reasonable collection potential. It is important to achieve a resolution that will help satisfy any pending tax liabilities, but it is equally important to have a plan that will be manageable for the taxpayer and will not put them into financial hardship.
I understand how you feel when the IRS is questioning every dollar you spend and that is why I get panicked calls from clients who fear that the IRS is going to take their house or car, or other property necessary for daily living. The IRS does not have the best reputation of cutting delinquent taxpayers much slack, so that is why I wrote this chapter for you. Although a favorite saying of IRS revenue officers is that “The IRS is not a bank” and takes collection of taxes owed seriously, the IRS is prevented from collecting assets that a person needs to survive and meet their basic living requirements.