When representing an individual tax debtor in an IRS Collections matter, determining the taxpayer’s ability to pay becomes the crux of the issue after addressing return compliance and accrual of additional tax debt. In this article, you will learn the basics of the Collection Financial Standards and how to apply them in your client cases.
The purpose of the IRS Collection Financial standards is to determine an individual taxpayer’s ability to repay their taxes. The standards are applied to a variety of scenarios, including determining Installment Agreement payment requirements, eligibility for Currently Not Collectible (CNC) status, minimum Offer in Compromise (OIC) amounts, eligibility for levy releases, etc.
The only time these Standards are not applied in an individual Collections matter is when a taxpayer has sufficient equity in assets to full pay the tax liability, or if the taxpayer is eligible for Guaranteed or Streamline processing. Even, if you telephone ACS or use the Online Payment Agreement tool, you will still be asked to provide basic living expense information, even though it’s not required by IRC or IRM.
As an aside, it may be helpful to remind you that, as of this writing, the IRS has not extended the Streamline test criteria that had been in place since January 1, 2017, and thus the liability thresholds for Streamline processing have reverted to normal values.
The purpose of the Standards is to differentiate between necessary and unnecessary living expenses, and the Standards are based around a middle class lifestyle. The numbers are generated from various statistical surveys and government agency data about the cost of living. The Standards are designed to cover basic living expenses only, although the Service may allow for actual expenses in certain situations. Taxpayers that are living beyond the standards will be asked by the IRS to reduce their lifestyle to below the Standards, or seek a different resolution to their tax liability.
The categories of living expenses covered by the Standards may seem narrow in scope to many of your clients. The fact that many common expenses, such as higher education tuition, tithing, retirement contributions, and the like are not allowable expenses will be a source of frustration for both you and your client. I highly encourage you to develop pre-scripted responses to address your client concerns over expenses that are not allowed, as it will be a frequent point of conversation.
Let’s now look at each of the expense categories in brief. The latest IRS Collection Financial Standards can be found on the IRS website at https://www.irs.gov/businesses/small-businesses-self-employed/collection-financial-standards.
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. As an example, here’s the table for the District of Columbia:
|County||2018 Published Housing and Utilities for a Family of 1||2018 Published Housing and Utilities for a Family of 2||2018 Published Housing and Utilities for a Family of 3||2018 Published Housing and Utilities for a Family of 4||2018 Published Housing and Utilities for a Family of 5|
|District of Columbia||2,211||2,596||2,736||3,051||3,100|
Notice that the table caps out at a family size of five. The Collection Financial Standards do not contain any per-person additions to this amount for a larger family. Theoretically, additional housing costs for additional family members is included in the additional per-person amount under the Lump Sum National Standard. However, conditional expense arguments can be made for a higher Housing and Utilities allowance in certain circumstances. Most such arguments will be based on local child welfare laws relating to the maximum number of children allowed to share a bedroom, and what is considered appropriate under local law regarding mixing of ages and genders that share a bedroom. An excellent source of information for summaries of such local laws are foster and adoption agencies.
It’s also important to note that this is another “lesser of” expense. For example, if your client lives in Washington, D.C. with a household of two, the maximum allowable expense is $2,596 per month. If your client actually only spends $1,778 per month on rent, electricity, and all other utilities, then the IRS would only allow the $1,778.
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. Be sure that you are applying the updated Standards for your client at the time of completing any 433-A/F form.
There is much more than can be explored in relation to the Collection Financial Standards, including conditional expenses and how the IRS conducts financial analysis. These topics can be reviewed in the Internal Revenue Manual Financial Analysis Handbook, section 5.15.1. This material is worth studying to enhance your competency in representation.
About the Author
Jassen Bowman, EA, CTR has practiced exclusively in the arena of IRS Collections representation for more than ten years. Has represented nearly 400 individuals and small business clients, and has presented over 300 live continuing education webinars and seminars to CPAs, EAs, and attorneys on the subject of IRS Collections. He is the founder of TaxMarketingHQ.com, which provides practice management and marketing resources to representation practitioners to help them grow more profitable firms. He is also the author of nine books, including Tax Resolution Secrets for consumers and Tax Resolution Systems, a checklist manual for practitioners.