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 22.214.171.124 (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.