If you have serious tax debt and the internet, you are likely familiar with the term "national standards". The IRS calls them more generally "Collection Financial Standards" and has this to say about them:
"Collection Financial Standards are used to help determine a taxpayer's ability to pay a delinquent tax liability. Allowable living expenses include those expenses that meet the necessary expense test. The necessary expense test is defined as expenses that are necessary to provide for a taxpayer's (and his or her family's) health and welfare and/or production of income." See "Collection Financial Standards"
On the page just mentioned, you can find what the IRS uses as "guidelines" to determine how much you should be living on each month as far as it is concerned. This determines how much you should have leftover to pay toward the debt. These numbers are used both in an installment agreement setting and in an offer in compromise calculation.
In Maricopa County, the standards for a Family of 3 are as follows:
- 1812 Housing and Utilities
- 1171 Food, Clothing and Expenses
- 992 Vehicle Ownership for 2 cars
- 582 Operating cost for 2 cars (includes insurance)
- 180 Out of pocket medical care under age 65
If the car payments and housing/utilities numbers are lower than the standards the IRS will use the lower number.
Examples of other items that are typically allowed in calculated the living expense amount:
- tax withholdings
- health insurance
- term life insurance
- regular out of pocket medical expenses greater than the standard
If the expenses for the Family of 3 are larger than these numbers, the IRS will try to treat those amounts as if they didn't exist. For example, if the Family actually spends 2400.00 per month for mortgage and utilities on the home, the IRS will treat the difference of 588.00 as "available" to pay the tax debt on a monthly basis.
The IRS will consider however the higher number i.e. allow for the actual expense in certain circumstances. As it states on the same page linked to above:
"If the IRS determines that the facts and circumstances of a taxpayer's situation indicate that using the standards is inadequate to provide for basic living expenses, we may allow for actual expenses. However, taxpayers must provide documentation that supports a determination that using national and local expense standards leaves them an inadequate means of providing for basic living expenses". (Read more here)
The IRS employee making the determination about whether the standard or whether the actual number should be used, doesn't have a tremendous amount of discretion. As a result, most taxpayers who have expenses that exceed the standards find themselves in a no win situation. i.e. a requirement to pay the same amount of money to two different creditors.
The result is often that the payment plan agreed to fails in the end and the taxpayer is back where he or she started.
There are other solutions to this problem. Some of which include:
- paying the debt below 25000.00 in order to avoid basing the payment plan on the standards and the taxpayer's income
- using the Taxpayer's actual budget where the remaining excess income will pay the debt over 5 years
- filing for chapter 7 bankruptcy where the debt or some large portion of it is dischargeable
- filing for chapter 13 bankruptcy where the debt is dischargeable and/or the budget allowed in the bankruptcy court is higher than the IRS standards
If your budget exceeds the standards, and you can't afford to pay the debt over 5 years or pay the debt to 25,000.00, you will probably need to look at other options.