If the amount of taxes you owe to the IRS seems unrealistic and too big to ever fully pay, you should consider hiring a tax attorney or Enrolled Agent to guide you through the tax debt resolution process. The IRS has institutionalized several programs that allow taxpayers to receive tax relief when a tax debt becomes too large to ever fully pay or if the fulfillment of your tax debt will cause you extreme financial woes. An Offer in Compromise (OIC) is the most sought after tax resolution program that the IRS has made available. When your tax attorney or Enrolled Agent sends the IRS an OIC on your behalf, the resulting tax debt settlement is generally pennies on the dollar. However, not every taxpayer qualifies for the OIC program. In order to determine your eligibility, your tax attorney or Enrolled Agent will use the IRS’s guidelines to calculate your monthly Disposable Income (DI) using IRS Standards. These standards are allowable expenses set by the IRS that offset your monthly income. IRS Standards include the following categories:

  • Food, Clothing and Other Items

  • Out-of-Pocket Health Care Expenses

  • Housing and Utilities

  • Transportation

It is generally beneficial for taxpayers to use the IRS Standards when reporting expenses on Form 433-A(OIC). However, there is one critical shortcoming of the IRS Standards, namely, that they only account for up to five members of a household. Although taxpayers are usually required to use the IRS Standards when calculating their DI, a taxpayer may use actual expenses if, “the facts and circumstances of a taxpayer’s situation indicate that using the standards is inadequate to provide for basic living expenses,” (IRS National Standards). For example, if your household contains six or more members, then you may use your actual living expenses for items such as food, rent, and utilities since the standards are unlikely to account for your true monthly cost. If using your actual expenses in place of the IRS Standards is beneficial and more truly represents your unique situation, you will have to provide proof of those expenses through documentation. However, using the IRS Standards requires no proof.  

When determining which monthly expenses to include (and when the IRS determines which monthly expenses to allow), your tax attorney or Enrolled Agent must ensure that any expenses you want to report meet the Necessary Expense Test. The IRS defines the Necessary Expense Test as expenses that are necessary to provide for you and your family’s health, welfare, and production of income. An example of an expense that will not be allowed are costs associated with a family pet. However, if you or someone in your household is legally blind and requires a service animal, the IRS may allow you to include expenses associated with the service animal.

For a full list of the items that are includible in each of the four categories, visit the IRS National Standards webpage or consult with your tax attorney or Enrolled Agent.

Settling your tax debt can entail a long and complicated process. For more information on how the Hillhurst Tax Group located right off of Los Feliz and the 5 Freeway can help you with all of your IRS tax problems, email us at info@hillhursttaxgroup.com or call us to set up a free consultation with our Los Feliz IRS tax attorney or Enrolled Agents at (323) 486-3314.