IRS releases updated collection financial standards for ability-to-pay
The IRS has released its Collection Financial Standards for 2012. The Collection Financial Standards specify the amounts that taxpayers may claim as basic, necessary living expenses when they claim that paying their taxes will cause an undue hardship. The IRS also applies the standards when taxpayers ask for an extension of time to pay the tax shown on their return.
Food and clothing
The new national standards specify monthly dollar figures for the amount of necessary food, clothing, housekeeping supplies, and miscellaneous expenses that may be taken into account while determining a taxpayer's ability to pay its delinquent taxes. Taxpayers are allowed the total national standard amount, even if it is higher than the amount actually spent. The national standards for food, clothing and other related items range from $565 per month for one to $1,450 per month for a family of four (up from $535 to $1,377 in 2011). For each additional person above four, taxpayers may add $281 to the four-person allowance (up from $262 in 2011).
Taxpayers must provide documentation to substantiate expenses exceeding the national standard amount. For miscellaneous expenses, the taxpayer must use the standard amount. In general, the number of people used to arrive at the correct national standard should be the same number of exemptions claimed on a taxpayer's most recent tax return.
With respect to food expenses, the IRS has clarified that:
• Food includes food at home and food away from home;
• Food at home refers to the total expenditures for food from grocery stores or other food stores, but excludes the purchase of nonfood items;
• Food away from home includes all meals and snacks, including tips, at fast-food, take-out, delivery and full-service restaurants.
Other expenses included in this category and subject to the national standards are: housekeeping supplies (i.e. laundry, cleaning, stationery, and lawn and garden products), apparel and services clothing (i.e. clothes, shoes, material, clothing rental, dry cleaning, and jewelry), and personal care products (i.e. hair, oral hygiene, shaving needs, and cosmetics).
Out-of-pocket health care expenses
The national standard for out-of-pocket health care costs is unchanged from 2011. The standard amount remains $60 per month for individuals under age 65 and $144 per month for individuals age 65 and older.
Out-of-pocket health care expenses include medical services, prescription drugs, and medical supplies. Health insurance premiums are excluded from this category. Taxpayers and their dependents are allowed the standard amount monthly on a per person basis, without questioning the amounts they actually spend.
Housing and utilities
The national housing and utilities standards include mortgage or rent, property taxes, and maintenance, along with gas, electric, water, heating oil, garbage collection, telephone service, cell phone service, cable television, and Internet service. The standard amount for housing and utilities is computed based on the state and county where the taxpayer resides and the taxpayer's family size. For example, a family of five residing in the District of Columbia would have a standard amount of $2,913 (or the actual amount of housing and utility costs, if less than $2,913). A family of five residing in Buffalo County, South Dakota would have a standard amount of $1,369.
Additional sample table figures, among the hundreds posted, include the following amounts (one person/5 or more):
- Arlington County, Va.: $2283/$3201
- East Carroll Parish, La.: $922/$1,293
- Howard County, Md.: $2,266/$3,177
- Hunterdon County, N.J.: $2,570/$3,603
- Maverick County, Tex.: $1,063/$1,491
- New York County, N.Y.: $4,076/$5,716
- Orange County, Ca.: $2,448/$3,432
- Owsley County, Ky.: $819/$1,148
- Wilcox County, Ala.: $987/$1384
This year the standards for the following U.S. territories were eliminated: American Samoa, Guam, Northern Mariana Islands, and the Virgin Islands. National standards are provided for Puerto Rico.
The transportation standards for taxpayers with a vehicle take into account monthly loan or lease payments and monthly operating costs. The IRS uses a single nationwide allowance for public transportation. If a taxpayer owns a vehicle and uses public transportation, expenses may be allowed for both, subject to certain rules. The 2012 nationwide allowance for public transportation expenses is $182 per month, per household.
The allowance for car ownership is $517 per month for one car and $1034 per month for two cars. A single taxpayer generally is allowed an allowance for one automobile. If a taxpayer's monthly lease or loan payment is less than the ownership cost allowance, the taxpayer must use that lesser amount. If a taxpayer has no lease or car loan payment, the allowance for ownership costs is $0.
For car owners, the national standards provide different standard allowances for operating costs, depending on what region of the United States the taxpayer resides in. Operating costs include expenses for maintenance, repairs, insurance, fuel, registrations, licenses, inspections, parking, and tolls. They do not include personal property taxes.
Additional sample figures for operating costs in the following regions include (one car/two cars):
- New York: $342/$554
- Chicago: $262/$524
- Dallas–Ft. Worth: $277/$554
- Detroit: $295/$590
- Los Angeles: $295/$590
- Miami: $346/$692
- Washington, DC: $270/$540
Taxpayers who are faced with making a late payment of taxes may incur interest and penalties, but there are alternatives available. For some of these alternatives, the IRS will look at the taxpayer's financial situation, and it may apply its Collection Financial Standards to determine what taxpayer expenses are justified and what the taxpayer can reasonably pay to the IRS.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.