Last week I sent an open letter to Henry M. Paulson, Jr., Secretary of the U.S. Treasury Department seeking changes to the Internal Revenue Service’s allowable standards policies. Their current practice of using outdated allowable standards, refusing to update those standards, and failing to accommodate in the face of clear and convincing evidence to the contrary is making the tax relief process unnecessarily difficult for taxpayers seeking IRS settlement.
The IRS has numerous relief programs available to help taxpayers that find them selves with large back tax liabilities. These programs, such as the Offer in Compromise or Installment Agreement, allow taxpayers to resolve their debt without having to pay down the entire amount at once. But when negotiate with the IRS you must complete a detailed financial analysis, which usually requires the help of a professional.
The financial analysis compares your gross monthly income with monthly allowable expenses to determine what, if any, payments you can reasonable afford. These allowable expenses do not include all monthly expenses, but only include expenses that the IRS deems necessary. The IRS sets these maximum allowable expenses include limits for food, housekeeping, clothing, personal care, entertainment, housing, utilities, vehicle, and vehicle operating expenses. A person’s household size, income, and geographical location all have an effect in determining each individual’s allowable amounts.
Unfortunately, the IRS calculates the allowable expenses for any given calendar year using statistical data gathered two years prior. Therefore, in any given year, the IRS uses two-year-old data to determine a taxpayer’s current and future allowable expenses, which in my opinion is flawed in the first place. Consider how much has the price of milk gone up over the past two years, constantly rising cost of gasoline. Using outdated statistics is unacceptable and I strongly suggest the IRS revisit the idea of this practice in the first place.
Then, as if using two-year-old data wasn’t bad enough, the IRS chose not to update its allowable expenses for 2007 whatsoever. The IRS is using statistical data from 2004 to determine the maximum amount taxpayers can claim as expenses in 2007, which is 100% unacceptable in my opinion. The IRS needs to update these requirements, which is why I have drafted a letter pleading that the IRS immediately update their allowable standards. Using three-year-old data to calculate a person’s allowable expenses is like kicking a taxpayer when they are down. This data needs to be updated.
With the letter I would also like to suggest that the U.S. Treasury Department reprimand the IRS Automated Collection Service Unit for its refusal to deviate from the allowable standards even in the face of strong evidence to support it. When a taxpayer can demonstrate that they are living within the average of their community, and the allowable standard is no longer reflective of that average, then the IRS employee must deviate to the taxpayer-requested amount. Failure to do so is in complete contradiction to the IRS’ own Internal Revenue Manual, which states, "National [and] local expense standards are guidelines. If it is determined a standard amount is inadequate to provide for a specific taxpayer's basic living expenses, allow a deviation."
In addition to drafting the letter, and sending it to various influential members of the government, my firm has also put out a press release on the issue, see Roni Deutch Sends Open Letter Urging the IRS to Update the Allowable Standards for Living Expenses. Hopefully my letter, and the issue in general, receives enough attention to convince the IRS to update their old standards.