In cases of tax debt, the IRS determines the ability of the taxpayer to pay the taxes owed. For that, the agency uses Collection Financial Standards. These Standards are used to determine the financial capability of a taxpayer to pay the back taxes so that a suitable collection method can be used to recover the tax debt. The Standards apply to collection methods, including Installment Agreements, Currently Not Collectible, and Offer in Compromise.
IRS Collection Financial Standards are not applied only if a taxpayer has adequate equity in assets to fully pay the tax debt, or if the taxpayer is eligible for Guaranteed or Streamline processing.
In all other scenarios, the IRS asks the taxpayer to provide details of their basic living expenses so that the agency can calculate the taxpayer’s ability to pay.
The Standards are used to differentiate between necessary and unnecessary expenses, based on a middle-class family’s lifestyle. It only covers basic living expenses though the IRS may allow certain expenses if they are deemed ‘necessary’ in certain situations. Main Street Practitioner shares further details:
“Lump Sum National Standard
This Standard is the ‘catch all’. It includes food, clothing, housekeeping supplies, personal care products and services, and miscellaneous expenses, including minimum credit card payments and other non-allowable expenses. A taxpayer is allowed full credit for this Standard, at the full amount, without need to document their actual expenses.
The current allowable amount for this Standard is $647 per month for one person in a household. It increases to $1202 for a two-person household, $1384 per month for three, and $1694 for four persons in a household. For each person beyond four, add $357 per month to the allowance for four people.
Out of Pocket Health Care and Health Insurance
In acknowledgement of the high cost of health care, and the fact that insurance obviously doesn’t cover everything, the IRS allows a minimum amount for out of pocket health care costs, regardless of what a taxpayer actually spends. This amount is $65 per month for individuals under 65, and $114 for those 65 and older.
In addition, since the Affordable Care Act requires most people to have health insurance, a taxpayer is allowed to claim the full amount of their health insurance premiums, regardless of the level of plan they have. For example, the Standards do not differentiate between allowing for a Bronze versus a Gold plan, despite the difference in premiums.
Taxpayers are allowed a monthly expense for public transit or vehicle ownership, but not both. Taxpayers can purchase or lease a vehicle, and is intended to provide them the ability to get back and forth to work. As such, an individual is typically only allowed credit for one car. For a multi-person household, a maximum of two vehicles are typically allowed, regardless of the number of working adults within the household. There are conditional expense arguments that can be made for additional vehicles, but they are evaluated on a case-by-case basis.
The national public transit allowance is $178 per month, regardless of where the taxpayer lives. This full amount may be claimed regardless of what they actually spend, without documentation, even if they spend less.
For vehicle ownership, the monthly lease or car payment cannot exceed $497 per month, per vehicle. If the taxpayer’s payment is less than this amount, they may only claim the actual monthly payment, not the full $497.
Taxpayers are also permitted to claim a monthly expense for vehicle operating costs. This amount is intended to cover insurance, maintenance, registration, tolls, fuel, and other operating costs. This amount is not national, but rather based on local variations in cost.
To determine the operating expense limit applicable to your client, the IRS has broken the country into four regions (Northeast, Midwest, South, and West), and defined operating expense caps for those regions. Then, within those regions, the IRS defines metro areas that have different costs from the region. These metro regions are defined as a collection of counties.
For example, if your client is located in Abilene, TX, this would be considered part of the South region, and the taxpayer would be allowed a maximum of $196 per month, per allowable vehicle, for operating expenses. The only special metro region defined for Texas is the Dallas-Ft. Worth area, which does not include Taylor County, which Abilene is part of.
For a full break down of the states included in each region, and the counties that comprise each metro area, along with the monthly operating expense limits for these areas, see the IRS table at https://www.irs.gov/businesses/small-businesses-self-employed/local-standards-transportation.
One final note on vehicle operating expenses: Technically speaking, the taxpayer is only permitted an allowance for the lesser of their actual vehicle operating costs or the Standard.
Housing and Utilities
The local standards for housing and utilities tend to be the most contentious. Since these local standards for housing do not take into consideration the variations in housing costs that occur from one end of a particular county to another, many taxpayers may think these Standards to be unfair.
The housing and utilities standards are provided in tabular format for every county in the country, broken out by state. The Standard covers either rent or mortgage payment, and also covers taxes, insurance, maintenance, heat, water, electric, landline telephone service, cell phones, cable, and Internet.
To find the allowable maximum for your client, visit https://www.irs.gov/businesses/small-businesses-self-employed/local-standards-housing-and-utilities and select the appropriate state, then scroll down to the appropriate county.”
“Applying IRS Collection Financial Standards
Understanding these standards is fundamentally important to your ability to properly represent individual tax debtors in front of the IRS. You will apply these standards whenever you:
- Apply for an Installment Agreement on a tax liability over $25,000.
- Apply for an Offer in Compromise of any amount.
- Request Currently Not Collectible status.
- Request levy release on financial hardship grounds.
The Standards are actually applied on the Income and Expense Table (IET) found in Section 5 of IRS Form 433-A. They are also applied to the expense section of Form 433-F, and in Section 7 of Form 433-A(OIC) found in the Form 656-B booklet. These are forms you will need to become familiar with as an IRS Collection representation practitioner.
The Standards are updated on an annual basis, usually at the end of March of each year.” To look for updates on the Standards, you can visit this IRS Collection Financial Standards page.