Financial Standards – Housing Expense

Usually, the largest single expense a taxpayer or family incurs on a monthly basis is their housing expense.  That encompasses for renters:

  • monthly rent or lease payment
  • monthly utility costs (e.g., electricity, gas, water, waste disposal)
  • monthly average of other rental expenses, such as renter’s insurance, telephone service (landline and cell), internet and television services.

For taxpayers who own their home, the housing expense would be the total of the following:

  • monthly mortgage payment(s)
  • monthly average of utility costs
  • monthly average of the property taxes (annual tax divided by 12)
  • monthly average of homeowner’s insurance (annual divided by 12)
  • monthly average of repairs and any other housing expenses (see examples above)

The total house expense calculated above is then compared with the housing expense standard for (a) the county in which the property is located, and (b) the number of persons living in the household.

Besides a spouse, the only other individuals that are considered by the IRS as family members for the purpose of this table are those who qualified for a dependency exemption on the taxpayer’s most recently filed tax return.  Of course, if a new dependent exists for the current year (as an example – the taxpayers have a new baby born in the current year), the taxpayers should be allowed that additional family member for the purpose of calculating the maximum allowable housing expense amount.

To illustrate, assume our taxpayers (husband and wife, and their three school-age children) live in Burbank, CA, in an apartment.  Their monthly rent, including utilities, renter’s insurance, telephones (landline and cells), cable TV and internet is $3,000 a month.  Burbank is in Los Angeles County.  So, we go to the table for CALIFORNIA, then find LOS ANGELES COUNTY.  We go over to the column for 5 family members, and the allowable amount is $3,009.  Since their total housing cost ($3,000) is less than the standard amount ($3,009), they will be allowed the entire $3,000 as a qualified housing expense in determining their net disposable income.  They will need to provide a copy of their lease or rental agreement, evidence of the rent payments (usually the IRS wants the last three months), and copies of their utility and other bills to prove their average utilities and other listed expenses.

Let us change this example and instead consider the same couple, but this time with only one (1) child instead of three.  The standard for Los Angeles County for a family of 3 is $2,656.  That is LESS than the $3,000 the taxpayers are currently paying.  The IRS will compute net disposable income using $2,656 since it is LESS than their actual expense.

What will this affect?  If the taxpayers opt to continue living in their present housing, they are going to be really stretched thin because of the excess amount they have to spend for housing over what was allowed.  What options do they have?

  • They can do nothing and stay in this apartment in Burbank, CA and figure out how to cut somewhere else to be able to make the required IRS monthly installment payment and still be able to pay for their existing housing
  • They can ask for a short (certainly 90 days is reasonable) period for making a transition to less costly housing in Burbank or some other city.  In this circumstance, the IRS will generally calculate the monthly payment for the first three months using the taxpayers’  current housing expense, and then the monthly payment would adjust upward in month four by the difference between the standard and current housing expense.
  • The taxpayers can look for additional sources of income to enable them to stay in their current housing.  However, unless the installment agreement was a full-pay agreement, it will be reviewed usually every two years.  At the time of the next review, if the taxpayers still have the increased income, the monthly payment would be adjusted upward and they will find themselves back into the same problem.

Shared living scenario with only one of the taxpayers having a tax liability

There is a unique problem when you have a situation where more than one person lives in the housing unit, but only one has the tax liability.  This is actually quite common – and that is why I am addressing it here.

Consider a couple – a man and his girlfriend in this example – living together in a rented apartment.  Only the man has a liability, and he is seeking an installment agreement.  What will the IRS allow for the housing expense since part of it certainly pertains to the non-liable taxpayer (his girl friend)? 

The IRS will typically calculate all of the costs for the housing as described above.  Then, they will compare the total income of all members of the household (yes – the girl friend will have to cooperate and provide her monthly income even though she is not liable for the tax).  In our example, the man averages $4000 a month, and his girl friend makes $2000 a month.  Of the total household income. the man earns 2/3 and the girl friend 1/3.    If the total housing expense is $3000 a month, then the IRS will allocate $2,000 (2/3 ) to the man.  That amount is compared to the standard for one person (we assume the girl friend does NOT qualify as a dependent).  The man will be allowed the lesser of the 2/3 of his allocated share of expense or the standard for one person.  If this apartment were in Burbank CA, the standard for one person in Los Angeles County would be $2,146.  So, in this example, he would be allowed the full $2,000 allocated to him.

This blog is not the forum for me to discuss all of the atypical scenarios that can arise in the calculation of the allowable housing expense for purpose of an installment agreement or offer in compromise.  This determination is made on a case-by-case basis.  It can get more complicated. Just as an example, if the taxpayer has an office in the home out of which he runs his business, then part of the residence is actually a business asset – nor residential.  So, we now get into doing a further allocation to remove the business portion out of this computation.  This is fun stuff (not!).

For many taxpayers seeking installment agreements, offers in compromise, or even a CNC determination, having professional representation can make a significant difference in the outcome as taxpayers generally would be unfamiliar with all of the nuances (and opportunities for a more favorable outcome) involved in this whole process.

Hopefully, you now have a better understanding of just how the housing expense table gets applied, and what happens when housing is shared and the other party is not liable for the tax debt.

 

 

 

 

IRS Collection Financial Standards – Overview

Back in 1998, the IRS was under attack by the Senate in what was termed the “Roth Hearings.”  The hearings were a review of allegations of misconduct by a few IRS employees and other issues affecting the IRS operations.  One of the findings of the Committee was the apparent lack of standardization across the IRS organization concerning “reasonable” amounts to allow for personal expenses when evaluating collection alternatives.  The Commissioner was directed to formulate local, regional and national standards to ensure consistency of taxpayer treatment regardless of the IRS office to which a taxpayer is assigned.  Hence, the Collection Financial Standards were formulated and published.  They are updated annually usually during March of each year (in 2016, it was delayed until April).

The standards are applied by IRS employees when evaluating collection alternatives, including a request for currently not collectible status (CNC).  The taxpayers submit their financial statement (Form 433-A or 433-F) listing their sources of income and the actual amounts they spend for the various categories of expenses listed on the form.  The focus of the form is to calculate the net disposable income (gross income less expenses, including current year taxes – income, FICA, Medicare, State taxes, if applicable) – and that resulting figure is usually the amount that is used in setting the monthly payment or the base for calculating the minimum offer amount in an OIC request.

For example, assume a taxpayer with his spouse and one child (family of 3) lives in Pasadena, California (Los Angeles County).  They have a lease and are paying $2500 a month, and another $400 a month in utilities.  The total housing expense plus utilities is then $2,900.   The April 10, 2016 revision of the Standards lists $2,666 as the amount allowable for housing and utilities in Los Angeles County for a family of three (3).  So, the IRS will re-calculate the net disposable income on the financial statement by INCREASING it by the difference of $234 (the excess the taxpayer is paying over the standard for the county in which they live).

Depending on whether the taxpayer will be able to pay off in full the liability within the statute date, the IRS employee MAY allow the larger amount, or in the alternative, permit the taxpayers to make a smaller payment for, say, six months, to give them time to find less expensive housing.  However, for an Offer in Compromise or partial payment plan, the IRS will almost never exceed the applicable standards in calculating the minimum acceptable offer or payment amount.

The standards are guidelines and generally will be followed unless there is evidence to justify deviation.  For instance, a taxpayer may have a medical condition or disability that requires specialized lodging or meals the cost of which exceeds the amount allowed per the standard.  The IRS employee can allow the extra amount providing there is written evidence to support a larger number.

I want to discuss one other area where I find employees are not consistent in their determinations.  That relates to current taxes – and in particular, to taxpayers who are required to make estimated tax payments but have not done so up to now.  I have had Revenue Officers and Service Center collection employees tell me that they are not going to allow a provision for current taxes since the taxpayer previously has not been paying them!  Well, that is crazy.  Why would any IRS employee put a taxpayer into a payment plan that is doomed from the outset because there is insufficient money left over with which to pay current taxes?  Fortunately, the Internal Revenue Manual (the “Bible IRS employees are supposed to follow) addresses this situation.  It clearly states that “current taxes are allowed regardless of whether the taxpayer made them in the past or not. ”   IRM 5.15.1.10  (11-17-2014).  This is why many taxpayers who try to represent themselves in collection matters can get into trouble.  If the employee tells the taxpayer that he or she is not allowed the offset of the current taxes owed on current income, they may accept the employee’s statement at face value and agree to a plan with a prohibitive payment requirement leaving nothing to pay toward current taxes.  Then, in the following year, the plan will be defaulted when the taxpayers are unable to satisfy the tax liability on the return filed the following April.

In sequent blogs, I will talk about the four categories of the financial standards and provide insight on their application, and what options the taxpayer may have in influencing their application.

 

 

 

 

 

 

 

IRS Options for Tax Liabilities

Taxpayers get bills for tax, penalties and/or interest that result from (a) filing a return with a balance due and not paying it at the time,  (b) going through an audit (correspondence, office or field) or (c) the result of a document matching process at the Service Center (forgetting to include income such as interest, dividends, capital gain, etc).

So, you get a bill from the IRS.  What are your options?  Here is an executive summary.

(a) You write them a check (or make a payment, including by credit  or debit card for the full amount through the IRS website (www.irs.gov).

(b) You arrange to get into an installment agreement (payment plan) where you will pay off the amount you owe generally within 72 months.  If the amount you owe is LESS than $50,000, the process can usually be accomplished through the IRS website.  If you owe $50,000 or more, then you will need to go through a more tedious process that involves completing an IRS financial statement (Form 433-A or 433-F) and submit back-up documentation (such as earnings statements, bank statements, etc).  Depending upon the circumstances, the IRS MAY file a Federal Tax Lien if the amount owed is greater than $25,000.

(c) You set up a partial pay installment agreement (where your payments are based upon what you can afford, but in an amount that will not pay off the tax, penalties and interest within the typical 10-year period the IRS has to collect the taxes).  These are more difficult to negotiate and will require the IRS to periodically review the plan (typically annually or bi-annually) to see if your payments can be increased.

(d) You negotiate an Offer in Compromise (OIC for short).  This is a pretty intensive process wherein your propose to resolve your total liability (for all tax years) by a lump-sum (or short-term payments) of an amount that is LESS than what you owe. The OIC process (with the IRS anyway – not necessarily so with State agencies) is pretty objective.  If you meet the requirements, then you most likely will be approved.  On my website under Technical Issues, I have an extensive discussion about the OIC process.  Read more about it there.  Basically, to qualify, you must prove that there is no way you can resolve your outstanding liabilities (including future accrual of penalties and interest) within the 10-year CSED (collection statute expiration date).  There is one special type of OIC referred to as “Effective Tax Administration.”  Typically, this is a hardship-based OIC that is reserved for taxpayers who have serious medical issues (often terminal or life altering) that requires they retain their assets for future medical needs to prolong their life.

(e) You are granted a status of Currently Not Collectible (CNC for short).  This process requires submission of a financial statement (433-A or 433-F) along with supporting documentation that establishes that you can only barely meet your basic living expenses, and currently, you have no ability to be making payments on your liability.  Your account will be reviewed (either annually or bi-annually) to see if your financial situation has improved and you can begin making payments.  Typically, this status is applicable to taxpayers who have lost their job, had a reduction in pay, or have had some challenging  event in their life (like a medical emergency) that makes it impossible to pay anything at the current time.

The opportunity to pay your liability by means of an installment agreement, an OIC or for being given a temporary hold on collection (referred to as CNC status) is based upon your current expenses.  The IRS has published COLLECTION FINANCIAL STANDARDS that establish maximums they will allow for (a) living expenses, (b) housing expenses, and (c) transportation expenses in computing a payment or minimum offer amount.  They have also determined an allowance for out-of-pocket medical expenses (in the absence of documenting a larger expenditure).  I will be addressing these standards in a subsequent post.  In the meantime, you can Google IRS COLLECTION FINANCIAL STANDARDS and read more about them on the Web.

For any of the options above (other than making full payment or being granted an OIC), you need to remember that your liability will continue to accrue interest (at the current rate of 4% a year) and a late payment penalty (6% a year for the first 48 months following the original due date for the return).

There is one other important point.  The IRS will NOT entertain any payment option (other than full payment) if the taxpayer is not current with (a) filing of returns (at least for the past 6 years), and (b) for the current year – is having sufficient tax withheld from their wages or is making estimated tax payments (self-employed taxpayers almost always are required to make these).  Make sure your W-4 that you give your employer lists ONLY the exemptions and filing status you are eligible to claim.  If your W-4 is inaccurate and the IRS finds out about it, the Agency MAY direct your employer to withhold at the SINGLE-NO EXEMPTION rate.

The above is intended to give you an overview of options that are available in resolving your IRS liability.  All of these are discussed in more depth on my website (www.dicknorton.com).   Many State agencies have similar payment option programs they offer to delinquent taxpayers (those who have outstanding liabilities).

 

 

Welcome!

I have opted to jump into the deep end of the pool and start a blog.  The purpose is to be able to share (hopefully) helpful information for visitors who are involved with the Internal Revenue Service (IRS) in an audit, collection or an appeal of a tax matter.  I welcome comments and general questions.

This blog is NOT intended to provide personal guidance for an individual’s tax controversy.  If such guidance is needed, then please contact me directly and we can discuss personalized consultation or even representation if the matter is serious enough to require that level of assistance.

This blog is not a place to rant and rave about the IRS and its activities.  The agency employees are under a lot of stress due to the crazy budget restrictions imposed by a Congress gone astray!   While there were certainly a group of employees who appear to have done something really stupid (in Cincinnati – relating to the 501(c)(4) applications leading up to the 2012 election), there was no justification to punish the entire agency.  I hope to impart suggestions on how to get through various processes (collection, examination and appeals) with the least amount of financial bleeding!

This is my first blog, and I hope it turns out to be worth the time and effort I will be putting into it.   Comments are always welcome.

Enjoy!

Dick Norton