Collection Financial Standards
The Internal Revenue Service (IRS) Collection Financial Standards are an integral part of the U.S. tax collection process. They provide guidelines to determine a taxpayer’s ability to pay their tax debt while ensuring they can meet basic living expenses. These standards were developed to address criticisms that the IRS was inconsistent in their analysis of necessary expenses across the U.S. Some offices were very generous in their allowance for necessary expenses, while other offices were very conservative. Congress insisted the IRS develop standards to ensure more consistent evaluation of the delinquent taxpayer’s ability to make payments toward their liability, qualify for an offer in compromise, or determine that the taxpayer is in a hardship financial situation and placed in a currently not collectible status.
The standards are reviewed at the beginning of each calendar year and adjusted as necessary due to the financial impact of inflation and other market conditions. They can be found on the IRS website, or located through a Google or other search engine search for “irs collection financial standards.”
Purpose of IRS Collection Financial Standards
In response to concerns, the primary purpose of the IRS Collection Financial Standards is to ensure that taxpayers are not deprived of essential living expenses while repaying their tax debts. By establishing standardized allowances for various expense categories, the IRS aims to create a fair and uniform approach to assessing a taxpayer’s financial situation. These standards are used in several contexts, including:
- Offer in Compromise (OIC)
When taxpayers seek to settle their tax debt for less than the full amount owed, the IRS uses these standards to evaluate their ability to pay. - Installment Agreements
When taxpayers request to pay their tax debt in installments, the IRS assesses their financial situation using these standards to determine a feasible payment plan. - Currently Not Collectible Status
For taxpayers who cannot pay their tax debt due to financial hardship, the IRS uses these standards to determine if the debt collection should be temporarily suspended.
Structure of the IRS Collection Financial Standards
The IRS Collection Financial Standards are divided into five main categories:
- Food, Clothing, and Other Items
This category includes allowances for basic necessities such as food, clothing, housekeeping supplies, personal care products, and miscellaneous expenses. The allowances vary based on family size and geographic location. - Out-of-Pocket Health Care
This standard covers out-of-pocket medical expenses, including health insurance premiums, medical services, prescription drugs, and medical supplies. Allowances are provided for individuals under and over the age of 65. Unlike the other categories, if the taxpayer’s proven actual expenses exceed the standard, they will be allowed the actual amount. - Housing and Utilities
This category includes allowances for housing and utility expenses. The standards vary significantly based on the taxpayer’s location and family size, reflecting regional cost differences. - Transportation
The transportation standards cover vehicle ownership costs, operating costs, and public transportation expenses. These standards vary based on the number of vehicles owned and the taxpayer’s geographic location. - Other Necessary Expenses
This category includes additional expenses that are necessary for the health and welfare of the taxpayer and their family or for the production of income. These expenses may include child care, court-ordered payments (suck as spousal and child support payments), education, and professional association dues.
Impact on Taxpayers
The IRS Collection Financial Standards play a crucial role in ensuring taxpayers are treated equitably. By standardizing allowable expenses, the IRS aims to balance the need to collect taxes with the need to maintain taxpayer dignity and financial stability. However, the impact on taxpayers can vary:
- Fairness and Consistency
The standards provide a consistent framework for evaluating financial situations, reducing the subjective judgment of individual IRS agents. This consistency helps ensure fairness in the tax collection process. - Financial Relief
For taxpayers experiencing financial hardship, the standards can provide relief by recognizing essential living expenses and preventing excessive tax collection efforts. - Limitations and Criticisms
Critics argue that the standards may not fully reflect the actual cost of living in all regions, potentially disadvantaging taxpayers in high-cost areas. Additionally, some taxpayers may find the allowances insufficient for their specific circumstances. I have personally seen this in Southern California where I live and operate my tax practice. I have been successful in negotiating some adjustment to the application of the standard for this category of expense, but that opportunity varies among IRS employees and managers (who have the final authority to approve or reject a proposed resolution). This is one area where I believe a tax professional has a better chance of obtaining a deviation from the standard than a taxpayer.
Conclusion
The IRS Collection Financial Standards are a vital tool in the tax collection process, providing a structured approach to evaluating a taxpayer’s ability to pay their tax debt. By establishing standardized allowances for various living expenses, the IRS aims to ensure fairness and consistency while balancing the need for tax collection with the financial well-being of taxpayers. While the standards are generally beneficial, ongoing assessment and adjustments may be necessary to address regional cost differences and ensure they adequately reflect the true cost of living.
Understanding and navigating the IRS Collection Financial Standards can be complex, but they serve an essential function in maintaining the integrity and fairness of the U.S. tax system. As such, both taxpayers and tax professionals must familiarize themselves with these standards to effectively manage tax debt and related financial obligations.