IRS Allowable Living Expenses – Part One - Brotman Law - All Rights Reserved | 402 W Broadway, Suite 800 • San Diego, California 92101

Although a favorite saying of IRS revenue officers is that “The IRS is not a bank” and the Service does take collection of taxes owed seriously, the IRS is prevented from collecting assets that a person needs to survive and meet their basic living requirements. The IRS calls these “Allowable Living Expenses” and they are excluded from the calculation that collection agents use to determine a taxpayer’s reasonable collection potential. Keep in mind that regardless of the size of the liability, whether one thousand or one million dollars, the IRS will always allow the taxpayer to keep enough cash to pay for their allowable living expenses.

THE DEFINITION OF IRS ALLOWABLE LIVING EXPENSES

So what does the IRS consider allowable living expenses? The IRS has developed a test called the necessary expense test to determine whether or not it will allow an expense to be included. According to the Internal Revenue Manual (IRM), “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”.[1] These are further broken down by the IRS into three categories.

1. Allowable Living Expenses – based on published IRS National and Local Standards

2. Other Necessary Expenses – expenses that meet the necessary expense test, and are normally allowed

3. Other Conditional Expenses – expenses, which may not meet the necessary expense test, but may be allowable based on the circumstances of an individual case.[2]

HOW IRS ALLOWABLE LIVING EXPENSES ARE CLASSIFIED

First, allowable living expenses has been separated into five basic necessities: 1) Food, Clothing, Personal Effects, 2) Housing, 3) Transportation – Ownership, 4) Transportation – Operating, 5) Out of Pocket Healthcare Costs. Within these five categories, two of them (Food, Healthcare) are governed by set national standards, which are deviations of the statistics complied by the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey (CES). In these two cases, how much your monthly budget is for food and out of pocket health care is a fixed number. The allowable expense in these categories depends principally on how many members are living in the household. In addition, healthcare cost also takes into consideration how old that member of the household is. Current IRS national standards can be found here: https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/National-Standards:-Food,-Clothing-and-Other-Items.

It is important to note for collection purposes that these amounts are given to you to maintain your basic standard of living whether you exhaust them in a month or not. Therefore, if the amount that you actually spend per month is LOWER than the IRS national standard, you should indicate to the IRS that you wish for them to use the standards when computing your collection potentials. Many of the nicer collections agents (and there are plenty of them) will go ahead and give it to you automatically.

Continue to IRS Allowable Living Expenses – Part Two