IRS Law Blog

IRS allowable living expenses: Collection guidelines you need to know

Calculating your allowable living expenses is all about getting into the IRS’ head. You want to repay the IRS, and have a number in mind of what you can afford monthly, but will the IRS accept it?

It all depends on how your monthly living expenses match up to IRS budgeting guidelines.

The IRS calls these budgeting guidelines “allowable living expenses” (also referred to as “collection financial standards”). Allowable living expenses can be rigid, as the IRS has their own standards for your living expenses – they will need you to budget in an effort to increase the amount you can repay them.

That’s right: the IRS will not necessarily accept your reality, but instead replace it with theirs. The result is a higher payment than you can actually afford.

Here are examples of how IRS allowable living expenses work:

• Car payments, currently limited to $497/month. Any payment greater than $497/month will be challenged by the IRS, and added back into your free cash flow. The amount of your payment must be verified to the IRS, usually in the form of a statement from your bank showing the monthly payment and the amount you owe on the loan.

• Monthly out-of-pocket medical expenses. Right now, the IRS is automatically allowing $52/month for medical cost per member of your household. If you are over 65, the IRS will allow more, $114/month. If you spend less than the allowed amount, the IRS will still allow you the $52 without question or verification. If you spend more, the IRS will allow it if we verify it with statements from pharmacies or doctors. The allowable expense guidelines are a double-edged sword: sometimes they allow you more than you actually spend, while other times they limit your spending.

• Cost of housing and utilities. The IRS allowable expense guidelines will limit your housing/utilities based on the county you live in. For example, if you have a family of four and live in Harris (Houston) County, Texas, the IRS will allow you $2,103/month for your rent/mortgage and utilities. Two people living in Los Angeles County, California will get up to $2,583/month. The bigger the city, the more the allowance. But if your mortgage payment is $2,000/month, the IRS guidelines will not provide for your utility expenses. This requires verification of expense. If you spend less than the IRS allowance, the IRS should allow you the lower amount.

• Auto operating expenses – gas, maintenance, insurance. To the IRS, the cost of operating your car is like the cost of living in your house – the expenses are limited based on where you live. For example, the IRS will allow $196/month to run your car in Cleveland, and $338/month in Miami. Like the out-of-pocket medical expenses, IRS will allow you the auto operating expense amount even if you spend less, and no verification is necessary.

• Food, clothing, entertainment, personal care. No matter where you live, the IRS will allow the same amount to feed and clothe your family, increasing the amount for the number of your dependents. For example, for one person, the IRS will allow $637/month; for two in your family, $1,202/month; at three, $1,384/month; and for a family of four $1,694/month to live. For a family larger than four, the IRS will allow another $357/person. No verification is required, and the IRS will allow you their numbers even if you spend less, but will cap it if you spend more.

In addition, there are other expenses the IRS will scratch out of your budget without any allowance. Credit cards are treated harshly by the IRS, with their guidelines directing agents not to allow any expense for this type of debt. Payments on state tax debt are also limited to a percentage of your state tax debt to your IRS debt. For example, if you owe the IRS $100,000 and your state $10,000, and are paying the state $200/month, the IRS will allow a payment of only $20/month (your state debt is approximately 10% of your IRS liability).

But there is hope and ways to negotiate around the allowable living expenses. For starters, if you can repay the IRS in 60 months or less, the IRS will allow all your excess expenses, and respect your budget and reality as it is. The IRS can also accept a lower payment for a while, and then increase it later, and tier your payments. In most cases, the IRS can go as long as two years with a lower payment.

With proper negotiation, IRS agents can also understand that their guidelines simply won’t work and will only result in an agreement that you cannot keep. They can be sensitive, backing off and permitting some payment that will last rather than forcing an agreement where payment will never be made.

Ultimately, the IRS needs to understand that setting up an impersonal payment plan is not in anyone’s best interest.

Before calling the IRS, it is important to understand the rules that will be applied to the negotiations. IRS allowable living expenses are designed to get the IRS more money and throw away expenses the IRS does not think are necessary. Avoid the surprise. Before contacting the IRS, know how the IRS will view your living expenses, understand what they will be demanding, and be prepared to negotiate a better result.