Step 1. Enter size of household (i.e., the
number of people). Return
to top
/ RETURN
TO CHART
All of the expense guidelines or "standards"
start with how many people are in the "household." A
brief definition of the "household" is found on IRS Form
656:
"The entire household includes spouse, domestic
partner, significant other, children, and others that
contribute to the household."
This is an imprecise definition. Does it mean
you count a "significant other" only if he or she
contributes to the household"?
In any event, you select a number, either 1, 2,
3, 4, or more.
STEP 2. Enter the taxpayer's actual expenses in all
categories. Return
to top
/ RETURN
TO CHART
The categories are broken down by the IRS into several
key categories. These are, national (for food, clothing,
household needs etc.), national standards for health
care, local standards for housing (mortgage or rent,
insurance, property taxes, utilities, etc.), local for
transportation (divided into "ownership" and "operating"
costs, and "other necessary expenses."
The IRS Collection Financial Standards for "national"
categories are uniform over the country. The "local"
standards for housing and related expenses are based on
county of residence. The "local" standards for
transportation are referenced to metropolitan areas.
The allowance for "other necessary" expenses are the
taxpayer's actual expenses, to the extent that they are
reasonable and necessary.
In the typical case the taxpayer's actual expenses for
all categories are likely to be deemed excessive by the
IRS. The task for the taxpayer is to examine exactly
which expenses exceed the IRS guidelines and attempt to
trim the budget to allow some measure of "surplus"
income.
STEP 3. Calculate difference with IRS national
standards. Return
to top
/ RETURN
TO CHART
The national standards currently have two tables on
the IRS web site, one for the category including food,
clothing, household needs, etc., and another for
necessary health care expenses. These standards, or
expense limits, are uniform and do not vary by state or
other locale. That the IRS should deem such expenses to
be uniform seems to defy common sense, but nevertheless
that is the current IRS policy.
The flow-chart treats the budget comparisons with the
IRS standards as two separate steps (see step 4 "a" and
"b").
a. Food, clothing, household needs,
toiletries etc.
b. Health care expenses
Compare actual expenses for food, apparel,
household needs, garden needs, and etc. with the IRS
"national" standards. The taxpayer is allowed the IRS
figure regardless of actual expenses for each
category.
If the calculation shows the taxpayer's actual
expenses are less than the standard, he or she will still
be allowed the standard figure. This may in some cases
help the budget absorb what would otherwise be a surplus.
If the calculation shows the actual payment exceeds the
standard, the standard will be used.
Return
to top
/ RETURN
TO CHART
NATIONAL
CATEGORY
a. HOUSEHOLD SIZE ACTUAL STANDARD ALLOWED
SUBTOTAL
Food 1 $1,000 $750 750 750
2 $1,000
3 $1,500
750
Apparel 1 300 250 250 1,000
2 450
3 525
Household 1 500 450 450 1,450
2
3
Total actual 1,800 1,450
Amount taxpayer must trim his budget $350
Return
to top
/ RETURN
TO CHART
NATIONAL
CATEGORY
b. HEALTH CARE EXPENSES
The IRS moved this category from a state-governed
figure to a uniform national figure.
The bulletin issued by the IRS explains:
National Standards: Out-of-Pocket Health Care
These Out-of-Pocket Health Care Standards are
effective on October 1, 2007 for purposes of federal tax
administration only.
The table for health care expenses, based on Medical
Expenditure Panel Survey data, has been established for
minimum allowances for out-of-pocket health care
expenses.
Out-of-pocket health care expenses include medical
services, prescription drugs, and medical supplies (e.g.
eyeglasses, contact lenses, etc.). Elective procedures
such as plastic surgery or elective dental work are
generally not allowed.
Taxpayers and their dependents are allowed the
standard amount monthly on a per person basis, without
questioning the amounts they actually spend. If the
amount claimed is more than the total allowed by the
health care standards, the taxpayer must provide
documentation to substantiate those expenses are
necessary living expenses.
Generally, the number of persons allowed should be the
same as those allowed as exemptions on the taxpayer's
most recent year income tax return.
The out-of-pocket health care standard amount is
allowed in addition to the amount taxpayers pay for
health insurance.
NATIONAL - Out-of-Pocket Costs &endash; health
care
|
"B" HOUSEHOLD SIZE ACTUAL STANDARD ALLOWED
SUBTOTAL
|
|
|
SIZE OF HOUSEHOLD
|
|
1
|
|
2
|
|
3
|
|
4
|
|
5
|
|
CATEGORY
Health care 1 $1,000 $750 750 750
2 $1,000
3 $1,500
750
STEP 4 Adjust actual budget if necessary.
Return
to top
/ RETURN
TO CHART
If the actual exceeds the allowed limit, return to
Step 1 and adjust the budget. This may involve some "belt
tightening." Note, however, that amounts greater than the
standard may be allowed if reasonable and justified.
If the taxpayer's actual expenses do not exceed the
allowed limit, proceed to Step 5.
STEP 5. Local standards for housing, utilities,
etc. Return
to top
/ RETURN
TO CHART
Enter the taxpayer's state and county. This governs
the amount allowed under the IRS standards.
If the actual exceeds the allowed limit, return to
Step 1 and adjust the budget. This may involve some "belt
tightening." Note, however, that amounts greater than the
standard may be allowed if reasonable and justified.
If the taxpayer's actual expenses do not exceed the
allowed limit, proceed to Step 6.
STEP 6 Compare with IRS figures. Return
to top
/ RETURN
TO CHART
If there are no excessive expenditures, proceed to
step 8.
STEP 7. Return to step 1 and adjust if
necessary.Return
to top
/ RETURN
TO CHART
If any of these actual expenses exceed the IRS limit,
return to step 1 and try to adjust the actual budget to
fit the IRS.
STEP 8. Transportation. Return
to top
/ RETURN
TO CHART
Enter state and metropolitan area of taxpayer's
residence.
STEP 9. Compare budget with IRS transportation
figures. Return
to top
/ RETURN
TO CHART
a. Ownership amount
b. Operating costs
Transportation expenses are divided into 2
subcategories. These are, "a" ownership costs, and "b"
operating costs.
The IRS Manual rule for ownership costs is that the
taxpayer is entitled to take either the actual expense
(car payment) or the IRS limit, whichever is less; if the
taxpayer has no vehicle, or has one that is paid off,
he/she is not entitled to take any ownership expense.
This step and step 10 are basically the same step.
STEP 10. Compare with IRS standards. Return
to top
/ RETURN
TO CHART
At this step, compare the taxpayer's actual
transportation expenses with the IRS limits; if any
over-the-limit expenses exist, return to Step 1 and
adjust if possible. Although categorized by the IRS under
"local" standards, the figure for vehicle ownership is a
fixed national expense. The operating expense is variable
and linked to the taxpayer's metropolitan region.
The basic rule is that for either ownership or
operating costs the taxpayer is allowed the standard, or
the actual expense, whichever is less; however, if the
taxpayer does not own a vehicle he/she may use the
national standard for public transortation expense.
Note: the IRS Manual on financial standards for
transportation states: IRM
§ 5.15.1.7
If
a taxpayer has a car payment, the allowable
ownership cost added to the allowable operating
cost equals the allowable transportation expense.
The taxpayer is allowed the amount actually spent,
or the standard, whichever is
less.
If a
taxpayer has a car, but no car payment, only the
operating costs portion of the transportation
standard is used to figure the allowable
transportation expense. The taxpayer is allowed the
amount actually spent, or the standard,
whichever is less.
Taxpayers
with no vehicle are allowed the standard amount
monthly, per household, without questioning the
amount actually spent. So, if the taxpayer has no
expense for either ownership or operating expenses
(because he/she has no car) the taxpayer may claim
the standard public transportation expense.
IRM
§ 5.15.1.7
(05-01-2004)
STEP 11. Enter the taxpayer's actual income.
Return
to top
/ RETURN
TO CHART
This is another reality test for the taxpayer's
budget. If the taxpayer's income is insufficient to fund
the theoretical surplus which is the sum of the expenses
categories, clearly the taxpayer has no surplus income
with which to fund an offer for anything more than a
nominal amount. If the taxpayer can demonstrate that this
inadequate income is something beyond his or her control,
and that it is likely to continue without much
improvement in the near future (say, 48 months), then
this factor clearly helps the taxpayer make a feasible
offer.
If, on the other hand, the taxpayer's take-home income
clearly exceeds the expenses as entered, then the IRS
will be looking at that excess. The Service will multiply
the one-month surplus by either 48, or 60, or some other
number, depending on the payment option elected by the
taxpayer.
STEP 12. Adjust "other necessary expenses"
Return
to top
/ RETURN
TO CHART
If the result of the calculation is excessive surplus,
or the income is not sufficient to pay the projected
budget, it might be prudent to return to Step 1 and
rethink the last category, "other necessary
expenses."
The IRS Manual rule for other necessary expenses is
that the taxpayer is entitled to the full actual expense,
as long as it is reasonable and necessary.
STEP 13. Select payment option and multiply.
Return
to top
/ RETURN
TO CHART
Result: The amount to be offered based on reasonably
collectible income.
