Necessary & Allowable Living Expenses
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Some people wonder how or why the IRS can
dictate how they should live, and expect them to abide by that.
When a taxpayer owes the IRS for back taxes,
the IRS wants to make sure that you are not living an extravagant or luxurious
life style making it impossible to pay your back taxes.
After all, a lot of people adjust their life style to the income they
have, after their taxes have been paid.
If you do not owe the IRS, they don’t care how you spend your money.
The IRS has established
Collection Financial
Standards tables to define reasonable living expenses.
Some of these expenses are based on the area you live in.
Sometimes these may seem very unfair, or generous.
That depends on the life style you have developed.
These standards are based on Bureau of Labor Statistics (BLS) and are the
same used by the Bankruptcy Court.
Some people think it is a lot of BS.
These statistics are compiled from averages across the country.
Albeit, few of us seem to fit into the ‘average.’
Many tax professionals dislike this system because it is robotical and it does not take into account some unique circumstances.
The IRS is willing to consider allowing expenses that are necessary to
maintain life, health or income. The
word ‘necessary’ can be a subjective term.
Sometimes it may seem unfair when there is an
unexpected tax debt. While
your life style may be in line so you can pay your current taxes, an unexpected
tax debt may come from an audit that assessed additional taxes due to errors on
your tax returns; a bad tax preparer, identity theft, from facing additional liabilities in business when someone
else didn’t pay taxes due and you were unaware of that happening, and many other
unexpected causes.
The IRS has the legal right to enforce these
standards. If your life
style does not allow you to make payments the IRS deemed you should pay, you
will have to find a way around it until your tax debt is satisfied.
Some ways may be: creating more income in your household, an extra job or
part time work, selling some property, renting out part of your residence, reducing
some living expenses, etc. However,
doing this can sometimes create a trap.
The IRS can consider the additional income to be a greater ability to
pay! It may be best the find the
additional income after you have negotiated an agreement with the IRS.
Usually this is considered to be a temporary cure.
Once the taxes are paid you’ll likely stop generating the extra income to
have more free time and/or resources.
Also, over the long term, the effort of earning extra income can be
detrimental physically and psychologically.
You can get up to a total of 6 yrs to pay the
tax debt for any tax debt that the collection statutes will not expire
within that time. This requires some work and scrutiny to get what is called
“allowable conditional expenses.” Luxurious and frivolous expenses, still
will not be allowed.
You do have the right to be given up to one
year to change your life style so that you can meet the payments the
IRS demands. We call this the
‘graduated installment agreement.’ During that year you’ll make payments based
on your claimed expenses. That gives
you time to dispose of assets or expenses that are not necessary without taking
a chance of adversely affecting your credit or disposing of assets so quickly
you take unnecessary losses. Perhaps
your home bears a high payment. You
can sell it and find lower cost housing.
Perhaps you have a child in college with just a few quarters left to
graduation. Within that year you’ll
be free of the tuition payments. Because
of the recession that started in 2007 we saw this type of agreement extended
because the economy made it very difficult for
reasonable financial reorganization.
Other Articles:
(in process of updating and posting to the web. Available when there is a link.)
Annuitizing Assets to Produce Future Income
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