If you have an IRS tax debt and want to resolve it for less than the total amount due or you need special payment arrangements, the IRS will require you to provide a budget to show how much you can afford to pay each month. As set forth in the internal revenue manual, the IRS will allow you to maintain your normal monthly expenses if you can show that they are necessary for your “Health and Welfare” or necessary for “Production of Income.” In other words, the IRS will not ask you to pay more than you can afford while maintaining your essential needs.
At our office we do a thorough review of your expenses to try to show them as necessary for your “Health and Welfare” or necessary for “Production of Income, ” so the IRS will not force you to pay more than what is required under the Internal Revenue Manual.
What is a Necessary Expense?
A necessary expense is one that is necessary for the production of income or for the health and welfare of the taxpayer’s family. Taxpayers are allowed the National Standard Expense amount for their family size without a need to substantiate the amount actually spent.
If the total amount claimed is more than the total allowed by the National Standards, the taxpayer must provide documentation to substantiate and justify that the allowed expenses are inadequate to provide basic living expenses. National and local expense standards are guidelines. If it is determined a standard amount is inadequate to provide for a specific taxpayer’s basic living expenses, the IRS will allow a deviation. Living in the North East, many time, taxpayers can experience higher housing, transportation and commuting expenses.
Example: A taxpayer that cannot afford to sell their home, move and find new housing may be allowed stay in their home with a housing amount that exceeds the standard. A taxpayer with a physical disability or an unusually large family requires a housing expense that exceeds the local standard.
The total number of persons allowed for national standard expenses should be the same as those allowed as dependents on the taxpayer’s current year income tax return. There may be reasonable exceptions.
Example: Foster children or children for whom adoption is pending or Custodial parent released the dependency exemption to ex-spouse.
Transportation expenses are considered necessary when they are used by taxpayers and their families to provide for their health and welfare and/or the production of income. Operating costs include maintenance, repairs, insurance, fuel, registrations, licenses, inspections, parking and tolls. If a taxpayer has higher expenses due to commuting costs, those additional costs may be considered necessary and be permitted.
In situations where the taxpayer has a vehicle that is currently over eight years old or has reported mileage of 100,000 miles or more, an additional monthly operating expense of $200 will generally be allowed per vehicle (up to two vehicles when a joint offer is submitted.)
- Repayment of loans incurred to fund the Offer in Compromise or Installment Agreement may be allowed.
- A court ordered judgment would be allowed if the taxpayer is actually making payments on that liability.
- Minimum payments on student loans guaranteed by the federal government will be allowed for the taxpayer’s post-high school education.
- Education expenses will be allowed only for the taxpayer and only if it they are required as a condition of present employment. Expenses for dependents to attend colleges, universities, or private schools will not be allowed unless the dependents have special needs that cannot be met by public schools.
- Child support payments for natural children or legally adopted dependents may be allowed based on the taxpayer’s situation.
- College tuition or life insurance for children, made pursuant to a court order will not be permitted. The fact that the taxpayer is under court order to provide a payment should not elevate that expense to allowable status as an offer expense, when the IRS would not otherwise allow it.