IRS Allowable Living Expense Standards Do Not
Provide Taxpayers With a Sustainable Standard of Living
The
Taxpayer Advocate (August, 2017) has made findings as to the method the IRS uses to determine the amount
of basic living expenses it should take into account concerning
payment of tax debt over time. The following are the key points:
1.
Congress directed the IRS to make sure taxpayers who enter into
offers in compromise still have enough money to cover their basic
expenses.
2.
Congress told the IRS to
“develop and publish schedules of national and local allowances
designed to provide that taxpayers entering into a compromise have
an adequate means to provide for basic living expenses.”
3.
The IRS Allowable Living Expenses (ALE) standards have come to play
a large role in many types of collection cases (e.g.,
non-streamlined installment agreements, claiming economic
hardship... ).
4.
ALE standards are used by
the IRS to calculate a taxpayer’s monthly expenses, which in turn
affects the resolution of the taxpayer’s case because it reflects
how much he or she can afford to pay the IRS. ALEs cover common
expenses such as food, clothing, transportation, housing, and
utilities.
5.
The Taxpayer Advocate identified
the following problems with the current ALE standards:
a. "The standards are
based on what taxpayers pay, not what it costs to live. And since
many of the IRS standards are based on average expenditures, there
is a chance the taxpayer’s expense is greater than the survey
average."
b. "Spending
habits are not consistent over income levels. For instance, while
housing costs now account for about 25
percent of a family’s pre-tax income, among low income
renters, some may spend up to half of their pre-tax income on
rent."
c. "The ALE standards
are outdated and should include all expenses necessary to maintain
the health and welfare of households today, including an allocation
for digital technology access, child care, and retirement
savings."
d. "The IRS decreased the amounts for some of the expenses
in 2016 based on its belief that expenses are going down. This
was done despite the fact that the IRS and TAS reached a joint
agreement in 2007 saying “the allowance amount for any ALE
category cannot be decreased unless something economic changes
significantly, such as a major sustained recession or depression.” Even
with TAS’s concerns with the IRS decision last year, the IRS again
decreased ALE standards in 2017. All of our research shows that
costs are going up. More importantly, the average taxpayer is
facing more financial strain."
e. "Until there
is improvement, the ALE standards won’t truly capture what it
costs for a taxpayer to pay for basic expenses. And any taxpayer who
is unable to resolve their tax debt will be vulnerable to IRS
collection action otherwise prohibited by Congress."
The
Taxpayer Advocate post follows below:
At TAS, we help
taxpayers from all walks of life. When it comes to taxpayers
with tax debt, some taxpayers have the resources to pay their debt. This
blog focusses on the method the IRS uses to determine the amount of
basic living expenses it should take into account if a taxpayer
needs to pay his or her tax debt over time.
Congress directed
the IRS to make sure taxpayers who enter into offers in compromise
still have enough money to cover their basic expenses. Specifically,
in Internal Revenue Code (IRC) § 7122(d)(2)(A), Congress told the
IRS to “develop and publish schedules of national and local
allowances designed to provide that taxpayers entering into a
compromise have an adequate means to provide for basic living
expenses.” The resulting Allowable Living Expense (ALE)
standards have come to play a large role in many types of collection
cases. For instance, if you want a non-streamlined installment
agreement or are claiming an economic hardship, the IRS will want
you to give them the information found on IRS
Form 433-F, Collection Information Statement. IRS
Form 433-F relies on the ALE standards to calculate a taxpayer’s
monthly expenses, which in turn affects the resolution of the
taxpayer’s case because it reflects how much he or she can afford
to pay the IRS. ALEs cover common expenses such as food, clothing,
transportation, housing, and utilities.
In its efforts to
base the ALEs on reliable and consistent data, the IRS relies
heavily on the Bureau of Labor Statistics. In particular, the IRS
uses the Consumer
Expenditure Survey (CES), which measures what people spend to
live. I’ve identified these problems with the current ALE
standards:
-
The standards
are based on what taxpayers pay, not what it costs to live. And
since many of the IRS standards are based on average
expenditures, there is a chance the taxpayer’s expense is
greater than the survey average. There is also a chance the
taxpayer’s spending will be less than the survey average.
-
Spending
habits are not consistent over income levels. For instance,
while housing costs now account for about 25
percent of a family’s pre-tax income, among low income
renters, some may spend up to half of their pre-tax income on
rent.
-
The ALE
standards are outdated and should include all expenses necessary
to maintain the health and welfare of households today,
including an allocation for digital technology access, child
care, and retirement savings.
-
The IRS
decreased the amounts for some of the expenses
in 2016 based on its belief that expenses are going down. This
was done despite the fact that the IRS and TAS reached a joint
agreement in 2007 saying “the allowance amount for any ALE
category cannot be decreased unless something economic changes
significantly, such as a major sustained recession or
depression.” Even with TAS’s concerns with the IRS
decision last year, the IRS again decreased ALE standards in
2017. All of our research shows that costs are going up.
More importantly, the average taxpayer is facing more financial
strain. When income levels are broken into thirds, the
typical household in the middle third found its financial slack
drop from $17,000 in 2004 to $6,000 in 2014. This means
that middle
income families now have less opportunity to create a
cushion for unexpected expenses, bouts with unemployment or
long-term illness, or to make long-term savings a reality.
The IRS claims a
lack of data prevents it from updating the ALE standards. But
it’s hard to imagine taxpayers today surviving without daycare, a
basic home computer, or retirement savings. Furthermore, Congress
gave a clear directive. Congress didn’t intend for the IRS to
develop a system that was “good enough” based on available
information for the average taxpayer. Congress
wants all taxpayers protected.
The case of Leago
v. Commissioner demonstrates the degree of harm that can result
from ALEs that don’t meet the needs of taxpayers. Mr. Leago
suffered from a brain tumor that required surgery estimated to cost
$100,000. Mr. Leago had no health insurance. In
calculating how much Mr. Leago could afford to pay on his tax
liability, the IRS refused to allow the cost of Mr. Leago’s
operation because it wasn’t an expense he was currently paying.
The Tax Court remanded this case back to Appeals twice and there is
no further information after the second remand. However, it is
clear from the record that the IRS expected Mr. Leago to forego any
real possibility of surgery until he paid his IRS debt. A
taxpayer with the resources to pay for the surgery would likely see
a different outcome.
I’ve offered some alternatives
to the IRS. For instance, the IRS could consider an
alternative approach to determining household health and welfare,
such as the family budget or self-sufficiency standard. My
suggestions aren’t perfect; however, they’re a starting point. Until
there is improvement, the ALE standards won’t truly capture what
it costs for a taxpayer to pay for basic expenses. And any taxpayer
who is unable to resolve their tax debt will be vulnerable to IRS
collection action otherwise prohibited by Congress.
Additional
blogs from the National Taxpayer Advocate can be found at www.taxpayeradvocate.irs.gov/blog.
The views expressed in this blog are solely those of the
National Taxpayer Advocate. The National Taxpayer Advocate is
appointed by the Secretary of the Treasury and reports to the
Commissioner of Internal Revenue. However, the National Taxpayer
Advocate presents an independent taxpayer perspective that does
not necessarily reflect the position of the IRS, the Treasury
Department, or the Office of Management and Budget.