IRS Collection Financial Standards Insight from an IRS Tax Attorney

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If you are audited by the IRS and owe money, the IRS collections department has a process that determines what a taxpayer can afford to pay. The IRS Collection Financial Standards are used in calculating the repayment of delinquent taxes. These standards are used to determine if a taxpayer is able to pay a delinquent tax liability.

The IRS can determine what your total income is and what your expenses are. These numbers are collected using IRS forms and your numbers are compared to national set standards.

National Standards apply nationwide, and you are allowed the total national standard amount for your family size, without questioning the amount you actually spent. These standards can include items like transportation, housing and utilities, clothing and miscellaneous. The amount of the National Standard depends on the size of the family, and taxpayers can claim the total amount for the number of people in the family, without needing any documentation or proof. There are also National Standards for out-of-pocket health care expense, and these are calculated by a set standard amount per person, and again, there is no questioning the amount actually spent.

The allowances for housing, utilities and transportation vary based on where you live. These standards are known as the Local Standards, and the taxpayer is allowed whichever is less; the amount actually spent, or the local standard.

The Standards can be broken down as follows:

  • Transportation standard: This standard includes nationwide figures for ownership costs, which are loan or lease payments. The IRS also takes into account operating costs such as registration, insurance, fuel, repairs, and tolls.
  • Out-of-pocket health care standard: This national standard has been established for health care expenses such as prescription drugs, medical services, and optometry.
  • Food clothing and miscellaneous standards: This nationwide standard is based on statistics generated by the Bureau of Labor Statistics. The standard is based on the number of people living in your household. The items included in this standard include groceries, housekeeping supplies, personal care items, and clothing.
  • Housing and Utilities standard: This local standard includes mortgage or rent, property tax, repairs, gas, heat, water, electric, garbage collection, phone bills, television, internet, and property taxes.

The IRS determines if a taxpayer’s substation indicated that using standards is inadequate and may allow for actual expenses. However, if actual expenses are allowed, the taxpayer must provide documentation that shows that using national and local expenses standards are an inadequate measure of basic living expenses. Your New York Tax Attorney can advise on what specific documentations the IRS would look for.

This process is complex, and it can be simpler to reach a reasonable agreement with the help of someone who understands the system and IRS collection rules. An IRS Tax Attorney will be able to work with the IRS and you to find a way for you to pay off delinquent taxes owed.

https://www.irs.gov/Individuals/Collection-Financial-Standards

  • https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Local-Standards:-Housing-and-Utilities.
  •  https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/National-Standards:–Out-of-Pocket-Health-Care
  • https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/National-Standards:-Food,-Clothing-and-Other-Items
  •  https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Local-Standards:-Housing-and-Utilities.
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