In determining whether the IRS will accept an offer in compromise, the IRS determines the taxpayer’s monthly income and then allows the taxpayer to subtract from the income certain monthly expenses. Absent good cause, the IRS has promulgated local and national standards for most expenses. For example, the taxpayer is not permitted to deduct the cost of his or her monthly mortgage payment if it exceeds the allowable expense as determined by the taxpayer’s location.
The taxpayer may deduct the following expenses in the amount determined by the IRS’ local and national standards:
- Home expenses (mortgage and utilities): the lesser of the local standard or the taxpayer’s expenses.
- Food, clothing, and other items: the national standard.
- Healthcare: the greater of national standard or substantiated actual expenses.
- Vehicle ownership: the national standard.
- Vehicle operating: the greater of the local standard or actual operating expenses.
The taxpayer may also deduct the actual expenses of:
- Child support payments
- Childcare
- Education expenses
- Term life insurance
- Student loans
- Outstanding state tax liability
- Secured payments
If the taxpayer wishes to exceed the expense standards, the taxpayer must substantiate the need to exceed these amounts as necessary living expenses.[1] All deviations from the national standards must be verified, reasonable and documented in the case history.[2] However, keep in mind that the local and national standards are guidelines. The Internal Revenue Manual instructs the IRS: “If it is determined a standard amount is inadequate to provide for a specific taxpayer’s basic living expenses, allow a deviation. Require the taxpayer to provide reasonable substantiation and document the case file.”[3]
Please contact a tax professional for assistance in submitting an offer in compromise.
Jared M. Le Fevre is a Partner in the Tax, Trusts and Estates Practice Group of Crowley Fleck PLLP. Mr. Le Fevre represents taxpayers before the IRS, IRS Independent Office of Appeals, Tax Court, Federal District Court and state tax agencies throughout Montana, Wyoming, North Dakota, Idaho, and Utah. Mr. Le Fevre is involved in federal and state and local tax audits, appeals, and tax resolution throughout these western states. Mr. Le Fevre also advises clients on the tax effects of business and real estate transactions.
[1] See, e.g., https://www.irs.gov/businesses/small-businesses-self-employed/national-standards-food-clothing-and-other-items (accessed September 13, 2020).
[2] I.R.M. 5.8.5.22.1(2).
[3] I.R.M. 5.8.5.22.1(3).