TaxSOS.com Tax Problems Blog

September 20, 2017

IRS Allowable Living Expense Standards Do Not Provide Taxpayers With a Sustainable Standard of Living

The Taxpayer Advocate (August, 2017) has made findings as to the method the IRS uses to determine the amount of basic living expenses it should take into account concerning payment of tax debt over time. The following are the key points:

1. Congress directed the IRS to make sure taxpayers who enter into offers in compromise still have enough money to cover their basic expenses.

2. Congress told the IRS to “develop and publish schedules of national and local allowances designed to provide that taxpayers entering into a compromise have an adequate means to provide for basic living expenses.”

3. The IRS Allowable Living Expenses (ALE) standards have come to play a large role in many types of collection cases (e.g., non-streamlined installment agreements, claiming economic hardship… ).

4. ALE standards are used by the IRS to calculate a taxpayer’s monthly expenses, which in turn affects the resolution of the taxpayer’s case because it reflects how much he or she can afford to pay the IRS. ALEs cover common expenses such as food, clothing, transportation, housing, and utilities.

5. The Taxpayer Advocate identified the following problems with the current ALE standards:

a. “The standards are based on what taxpayers pay, not what it costs to live. And since many of the IRS standards are based on average expenditures, there is a chance the taxpayer’s expense is greater than the survey average.”

b. “Spending habits are not consistent over income levels. For instance, while housing costs now account for about 25 percent of a family’s pre-tax income, among low income renters, some may spend up to half of their pre-tax income on rent.”

c. “The ALE standards are outdated and should include all expenses necessary to maintain the health and welfare of households today, including an allocation for digital technology access, child care, and retirement savings.”

d. “The IRS decreased the amounts for some of the expenses in 2016 based on its belief that expenses are going down. This was done despite the fact that the IRS and TAS reached a joint agreement in 2007 saying “the allowance amount for any ALE category cannot be decreased unless something economic changes significantly, such as a major sustained recession or depression.” Even with TAS’s concerns with the IRS decision last year, the IRS again decreased ALE standards in 2017. All of our research shows that costs are going up. More importantly, the average taxpayer is facing more financial strain.”

e. “Until there is improvement, the ALE standards won’t truly capture what it costs for a taxpayer to pay for basic expenses. And any taxpayer who is unable to resolve their tax debt will be vulnerable to IRS collection action otherwise prohibited by Congress.”

Read More HERE

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