How to Understand the IRS Collection Financial Standards
It’s normal to panic when you find out you owe the IRS. If you don’t happen to have the money on hand to pay your debt in full, you might begin worrying about losing assets and being able to put food on the table. Fortunately, there are measures in place to protect taxpayers from losing everything trying to repay tax obligations. These standards are referred to as the IRS Collection Financial Standards.
How do the IRS Collection Financial Standards Work?
The IRS Collection Financial Standards are used to determine your ability to pay your tax liability, separate from your ability to pay necessary life expenses. It’s important to remember that the standards change periodically, so it’s important to remember to check back periodically to make sure that the numbers you’re using are still valid.
Some of the living expenses that are considered in these standards include the following:
- Food;
- Housekeeping supplies;
- Apparel;
- Personal care products; and
- out-of-pocket healhcare expenses.
Other necessary living expenses include those that you need to maintain your health, welfare, and ability to earn an income. Expenses like your home mortgage, phone bill, auto payment, and auto maintenance expenses, are typically included as well.
These standards fluctuate according to National and Local Standards, and are based on Bureau of Labor Statistics Consumer Expenditure Survey data. This means that when the standards decrease, the amount allowable for necessary living expenses also decreases.
Other factors such as the number of your exemptions on your income tax return can also be used to determine the amount of your necessities.
National standards have been established for food, clothing and other items. Examples of these national standards can be found here. All examples cited in this article are effective for financial analysis conducted on or after March 27, 2017. Amounts vary depending on whether there’s one, two, three, four or more members in the household. Other standards apply to out-of-pocket health care expenses. An example of national out-of-pocket healthcare expenses can be found here.
Local standards have been established for housing and utilities, and transportation costs. The housing and utility standards are further broken down by state, and then, by county. An example of local housing standards for New York County, New York can be found here.
Transportation standards consist of two parts: part one is a national amount for public transportation and monthly loan or lease payments. Part two is for operating costs and these costs, in turn, are broken down by geographic region of the country. Together these costs are meant to pertain to ownership (use) costs, and additional amounts for monthly operating costs. Examples of transportation standards can be found here.
If actual transportation costs are more than the total allowed by the transportation standards, a taxpayer will be required to provide the IRS with documentation showing that those expenses are actually necessary living expenses.
Affordable Tax Debt Payments
Once your ability to pay your tax liability is determined, you can qualify to repay your debt to the IRS based on the six year rule. This means that you have a period of six years, that is, 72 months, to pay your tax bill. Fortunately, this includes living expenses exceeding the standards as well as minimum payments on your other debts like student loans or credit cards.
Exceptions
It is possible that not every expense you have to pay will be included in the IRS computation of allowable expenses, and you might find that you still can’t afford your tax debt. Fortunately, there are exceptions to the standards if you happen to exceed what the IRS allows. For example, if you are unable to repay your debt within five years, the IRS could allow all expenses. You might also qualify for up to one year to eliminate any unallowable expenses.
Contact a NYC Tax Attorney with Experience
Calculating and determining which expenses to include as necessary living expenses can be complicated. It’s best to make sure you have a tax lawyer with experience working with IRS Collection Financial Standards for help. Don’t get stuck in a situation where you are unable to take care of day-to-day living expenses because you are trying to make payments to the IRS that are too high.
If you have tax questions or concerns, a NYC tax attorney at Mackay, Caswell & Callahan, P.C. has the experience you need on your side. To schedule a consultation fill out our online contact form or call 844-MCC-4TAX (622-4829) to speak with a tax lawyer from one of our offices in Albany, New York City, Rochester, Syracuse, Utica, and Watertown.
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