As former IRS Agents we are asked these questions many times. We are experts in the IRS Collection Division. 1-866-700-1040
1.Question. If, as a condition of employment, a minister is to tithe, a business executive is required to contribute to a charity, or an employee is required to contribute to a pension plan, will these expenses be allowed?
Answer. Yes. The only thing to consider is whether the amount being contributed equals the amount actually required and does not include a voluntary portion.
2.Question. A taxpayer has a child in a university. She has already paid the university $25,000 for tuition and housing for the school year. and she intends to pay another $25,000 next July for the following school year. Should this expense be allowed?
Answer.Yes, if the taxpayer can pay the liability plus accruals within five years. Otherwise, the expense will not be allowable. The taxpayer may be eligible for an allowable expense to cover the child’s enrollment at a local college if the reduced education expense could make it possible for the taxpayer to take advantage of the five-year rule. Tell the taxpayer that we expect an amount equal to the tuition. She is responsible for deciding what expense modifications or eliminations are needed to pay the tax liability.
3.Question. A taxpayer is starting the second year of two-year lease for a luxury car. Car payments are $1,200 a month. Should the taxpayer be allowed this expense?
Answer.Yes, if the taxpayer can full pay the liability plus accruals within five years. Otherwise, the taxpayer must justify the expenses in excess of the local standards. There are rare exceptions where an occupation may require a luxury car. The type of car can also depend on the location. A real estate agent will probably drive a more expensive car if she is working a suburb with very expensive homes rather than a middle class suburb. If the taxpayer could be expected to drive a more reasonably priced car, then steps should be taken to eliminate the expense. Ask the taxpayer what the penalty would be to return the car to the dealer. With only one year left on the contract, the penalty may or may not be negligible compared to the amount we could receive if the taxpayer leased a moderately-priced car.
4.Question. A taxpayer is living in an apartment which rents for $2,000 per month. The lease has another six months to run. The lease agreement includes a termination penalty equal to the lesser of two months rent or the monthly rent due for the balance of the lease. The taxpayer has a $500 security deposit. Local rental data indicated that an acceptable rental apartment in the same general neighborhood can be rented to house the family at a cost of $1,500 per month. The taxpayer cannot full pay within five years. Should the taxpayer be required to move to cheaper living quarters as a condition of an installment agreement?
Answer. Since breaking the lease would cost more than keeping it until expiration, an installment agreement may be written which allows the taxpayer to live in his present quarters for the balance of the lease but which requires an increase of $500 with the seventh month.
5.Question. A taxpayer is a commissioned sales person living in a home with a $3,000 monthly mortgage. The property was purchased in 2002 at the peak of the local real estate market and has lost approximately 25% of its value in that time due to local market declines. The present value is approximately equal to the mortgage balance. A single family home of a size adequate to house the family is available in a middle class neighborhood convenient to work and schools for $1,800 per month, including utilities. If the taxpayer remains in his home, income and expenses are approximately equal, leaving no disposable income to apply to the delinquent federal taxes. Should the account be reported currently not collectible?
Answer. No. The difference between the cost of renting and owning indicates that a significant payment can be made if the residence were sold. The loss of the taxpayer’s equity is not the primary consideration. Advise the taxpayer he will have up to one year to adjust his expenses so that the Service will then receive an amount equal to the excessive housing expense. Make an installment agreement for a lesser amount in the interim, with an increase in payment at the date the house is supposed to be sold. Advise the taxpayer that enforcement may be taken at the end of a year if the installment agreement defaults for any reason, including failure to pay the required increase. If there is a default, the taxpayer will have to demonstrate that a good faith effort was made to sell or borrow on the property.
6.Question. A taxpayer claims her cable TV expense of $40 per month is a necessary expense because she lives in a remote area where reception is poor. Should this expense be allowed?
Answer. Yes, if we can get a full pay within five years. But it is not a necessary expense. Also, the National Standards include an amount for “miscellaneous” expenses which could cover cable TV.
7. Question. A taxpayer claims that she needs more for food than the amount provided by the National Standards because she has five teenage children. Can she get an increased amount?
Answer. Yes, if she can fully pay the tax liability plus accruals within five years. Otherwise, she has to substantiate and justify the higher food expenses included within the National Standards. She would still be allowed the standard amounts for housekeeping supplies, apparel and services, personal care products and miscellaneous.
8. Question. Should a self-employed taxpayer who is currently making contributions to an Individual Retirement Account (IRA) be allowed to continue the contributions if it will take six years for her to fully pay the tax liabilities?
Answer. No. Tell the taxpayer to apply the amount going to the IRA to the tax liability, in addition to other identified disposable income. If the taxpayer wishes to continue making IRA payments, she must divert the money from allowed expenses.
9. Question. We have a joint tax liability against a married couple. They have submitted a Form 433-A. Our analysis indicates that it will take a four-year installment agreement to fully pay the tax liability. The husband is a truck driver who is responsible for his own food and lodging expenses on the road. He usually pays as he goes with a credit card. He requests that this monthly payment be allowed. Should we allow the expense?
Answer. First, we need to determine if these are business expenses. If they are, they should not appear on the Form 433-A. The income which appears on the 433-A should not reflect business expenses which have already been deducted from business income to arrive at personal income. If they are not business expenses and it’s determined they are necessary, they should be allowed. How they are paid, cash or credit card, doesn’t concern us. If the taxpayer needs to make minimal payments to keep his credit card active, he should be told that the payments should come from the amount allowed by the National Standards, which includes a miscellaneous amount. Then monthly additions to the credit card should be fully paid from the amount allowed for the expense.
10. Question. A taxpayer completed a CIS which indicates that she can fully pay the liability plus accruals within five years. Since the assessment of the tax liability, she has purchased a luxury car which has increased her expenses by $2,000 a month. Should the provisions of the five-year or the one-year rule apply?
Answer. If it appears that she, although aware of the tax liability, committed part of her disposable income to excessive necessary or not-allowable conditional expenses, the Service is not obligated to allow the excessive expenses even though the liability could be fully paid within five years. It may be appropriate to inform the taxpayer that for the Service to consider an agreement, she will have to pay us immediately an amount equal to the down payment on the car and to pay us, as part of an installment agreement, an amount equal to the increased monthly costs for the car. This amount would be in addition to her other disposable income.
11.Question. A taxpayer has a child in parochial school. Should the taxpayer be allowed this expense?
Answer. Yes, if we can get a full pay within five years. Otherwise, the expense will be allowed only if it is for a physically or mentally challenged child and no public education providing similar services is available. If the expense is not to be included among allowable expenses, tell the taxpayer that he or she is responsible for deciding what expense modifications or eliminations are needed to pay the tax liability.
12.Question. Because of budget constraints, a public school district has begun charging fees for certain services which were previously provided free. Should a taxpayer be allowed the expense of paying these fees?
Answer. Yes, if the fees are required of all children in the school district. Fees for optional services, such as music lessons, are allowable if the tax liability including projected accruals will be paid within five years.
13. Question. An area has an arrangement with Consumer Credit Counseling Services (CCCS) in which CCCS submits installment agreement proposals on behalf of the taxpayer. Are these cases subject to the new allowable expense procedures?
Answer. Yes, unless the agreement falls under the streamlined installment agreement procedures. Any installment agreement in which financial analysis is required will be subject to the allowable expense guidelines. The area office must share allowable expense procedures with CCCS.
14. Question. The corporation owes a $75,000 tax liability of which $55,000 is trust fund. The corporation does not have sufficient assets to pay, but two of the officers have in excess of $100,000 in assets. Do we need to assess the Trust Fund Recovery Penalty (TFRP) before we pursue payment of the liability from the responsible persons?
Answer. No, we do not need the TFRP assessed before we look to the responsible officers for payment of the corporate liability. Our investigation of the corporation should include an investigation of the officers or responsible persons. In this scenario, the officers should be asked to loan the full payment to the corporation. However, no enforcement actions could be taken against the officers until the assessment is made. Also, we would be limited to the collection of the trust fund only from the officers.
15. Question. A taxpayer lives with his fiance. Both of them are wage earners. The home is owned by the fiancé but the taxpayer claims he pays all the household bills. They have a joint checking account and all wages are electronically deposited to that account. The taxpayer’s proportionate share of household income is 64%. The house has a QSV of $15,000 after encumbrances. How would you determine the excess income and would you consider the real property in making a determination of payment?
Answer. The total allowable and conditional expenses would be determined for the entire household the same as a married couple. The taxpayer would then be allocated 64% of those expenses for purposes of the monthly installment agreement. In a situation such as this consideration should be given to asking the taxpayer if he has talked with his fiance’ about securing a loan on the equity of the home. A determination must be made on how income is allocated to expenses whether or not the occupants have a legal relationship (roommates, marriage) or the liability is joint or not. Unless it can be substantiated that the expenses are entirely separated, we will generally allocate expenses proportionate to income.
16. Question. A taxpayer submits a state court order that specifies the taxpayer will pay for his daughter’s college tuition and other expenses of his former spouse that would not otherwise be considered necessary expenses. Should the taxpayer be allowed these expenses?
Answer. Yes, if the taxpayer can full pay the liability plus accruals within five years. Otherwise, the expenses will not be allowable. He is responsible for deciding what expense modifications or eliminations are needed to pay the tax liability. If additional guidance is required, consult with area counsel.
This info was taken directly from irs.gov
