Legal Definitions - IRS expenses

The Internal Revenue Service (IRS) expenses refer to a set of standardized allowances for essential living costs, also known as collection financial standards. The IRS uses these figures to determine a taxpayer's reasonable ability to pay a delinquent tax liability. These standards ensure that individuals can cover their basic needs while also addressing their tax obligations. They are also sometimes used in Chapter 7 and Chapter 13 bankruptcy cases to help calculate a debtor's average income and disposable funds.

There are two main types of IRS expense standards:

• National Standards: These cover expenses that are generally consistent across the entire country, such as food, clothing, personal care products, housekeeping supplies, and out-of-pocket health care costs.
• Local Standards: These vary by state and even by specific metropolitan areas, reflecting differences in the cost of living for housing, utilities, and transportation.

The allowable amounts for both national and local standards are adjusted based on family size, with larger families typically receiving higher allowances. While these standards provide a baseline, taxpayers can sometimes claim actual expenses that exceed the standard amounts if they can provide thorough documentation proving the necessity of those higher costs.

Examples of IRS Expenses in Practice:

• Negotiating a Tax Payment Plan: Sarah owes a significant amount in back taxes and is struggling to pay. When she contacts the IRS to set up an installment agreement, the IRS agent uses the collection financial standards (IRS expenses) to evaluate her income versus her necessary living costs. They consider her family size, where she lives, and her essential spending on food, housing, and transportation. This assessment helps the IRS determine a monthly payment amount that Sarah can realistically afford without sacrificing her basic needs.

• Chapter 13 Bankruptcy Filing: David is filing for Chapter 13 bankruptcy, which requires him to propose a repayment plan to his creditors over several years. As part of the bankruptcy process, the court and the bankruptcy trustee will use the IRS's collection financial standards to calculate David's disposable income. This calculation involves subtracting his allowable living expenses (based on his family size and location) from his income to determine how much money is left over each month to pay his creditors according to the bankruptcy plan.

• Documenting Higher Necessary Expenses: Maria lives in a high-cost-of-living area and has a child with a chronic medical condition requiring specialized, expensive care not fully covered by insurance. When the IRS assesses her ability to pay a tax debt, her actual out-of-pocket medical expenses significantly exceed the standard allowance. Maria provides detailed medical bills and receipts to the IRS. Because she can document that these higher expenses are necessary for her child's health, the IRS may allow her to claim these actual, higher costs instead of the standard amount, thus reducing her calculated ability to pay the tax debt.