What Are “Allowable Living Expenses” to the IRS?

What Are “Allowable Living Expenses” to the IRS?

In last week’s blog, “The Secret Sauce to Tax Resolution – RCP” linked here, https://activerain.com/blogsview/5329707/norwalk–ct–the-secret-sauce-of-tax-resolution—-rcp- I gave an overview of how the IRS determines the dollar amount of delinquent taxes that a taxpayer can repay.


Over the next several weeks I will go further into detail on the mechanics of this process.

This week I am going to write about what the IRS considers to be a taxpayer’s “allowable expenses” in making this determination.


My firm, By The Book Taxes, located in Norwalk, CT., specializes in income tax preparation and tax resolution services.


The IRS uses statistics on cost of living expenses gathered by the Department of Labor.

These costs can vary greatly depending upon which region of the country you live in and whether you are in an urban or rural area. The chart below illustrates the types of living expenses that the IRS considers and whether they apply the taxpayer’s actual expenses, a local standard or a national standard in determining how much in monthly payments a taxpayer can afford to repay. This chart is from Eric L. Green’s book entitled, “The Accountant’s Guide to Resolving Tax Debts”, pages 24 and 25.


Expense Actual Or Allowable
Food/Clothing/Misc National Standard
Housing & Utilities Lesser of Actual or Local Standard
Automobile Ownership Lesser of Actual or National Standard
Automobile Operating Local Standard
Public Transportation National Standard
Health Insurance Actual
Out of Pocket Health Care Costs Higher of Actual Or National Standard
Court Ordered Payments Actual
Child/dependent care Actual (must be necessary)
Life Insurance Actual (must be reasonable)
Current Year Taxes Actual FIT/SIT/FICA/SE/Local
Secured Debts Actual
Delinquent State Taxes % of State vs. Federal Debt

If you have years of unfiled tax returns or have tax debts that need to be resolved, please call me, I can help.

Tax Resolution’s Secret Sauce: Reasonable Collection Potential (RCP)

Tax Resolution’s Secret Sauce: Reasonable Collection Potential (RCP)

How does the IRS determine how much of your tax debts you can afford to repay?

Should they insist on full repayment? Settle for less than what you owe them? Leave you alone for a year or two while you overcome a financial hardship like the death of a spouse, loss of employment, serious illness, divorce, etc?

Last week’s article linked here: https://activerain.com/blogsview/5326733/norwalk–ct–resolve-irs-debt-with-an-installment-payment-agreement spoke about Installment Payment Agreements where you can (in most cases) pay back your tax debts in full within the statutory time period allowed to the IRS through monthly payments.

There are also two (2) other resolution options available to you:

  • Currently Not Collectible
  • Offer in Compromise

Currently Not Collectible (CNC) status is granted when the IRS determines that it would create a financial hardship to collect taxes owed from a taxpayer who at the time doesn’t have the income or asset level to support repayment.

An Offer in Compromise is easily the most misunderstood of the tax resolution options available to taxpayers. It is also the subject of those crazy TV commercials claiming to settle taxpayer’s debts for pennies on the dollars.

With an Offer in Compromise, the IRS may accept a settlement that is less than the full amount owed.

The questions remain; how do they calculate this? How much should I offer? Would I be considered “uncollectible” given my current financial situation?

The answer isn’t magic, it is arithmetic. The answer is a concept called Reasonable Collection Potential or RCP which is the sum of two calculations:

  • Net Equity in Assets plus
  • Future Income

Net Equity in Assets

What assets do you have that can be used, sold or withdrawn to pay your tax debts? Cash, real estate, antiques, vehicles, cash value life insurance, retirement accounts and investment accounts are all scrutinized.

Take the quick sale value (80% of fair market value) of the non-cash assets and subtract from that any loans or mortgages against them. You are allowed to keep a vehicle and tools you own since they may be required to generate income.

What you are left with is Net Equity in Assets.

Future Income

 After subtracting your monthly living expenses from your monthly gross income, how much is left over to pay the IRS?

There are some important things to know here. It’s not just based upon your employment income, but rather all sources of income. This is a cash flow analysis, first and foremost.

Another thing to know is that not all expenses are created equal. The IRS uses cost of living standards that are developed by the Department of Labor. For the purposes of this analysis, depending on which expense category is involved, the IRS may accept your actual expense for health insurance, the national standard for public transportation or the local standard for automobile operating expense.

Take your monthly gross income from all sources and subtract your allowable living expenses based upon the standards the IRS uses. Multiply that number by twelve (12) and that’s your future income for the next year.

Add Net Equity in Assets to Future Income and that’s your offer.

If this calculation exceeds your taxes owed, your offer will be rejected. If you have few assets of value to sell and your allowable expenses equal or exceed your gross income, you are a good candidate for Currently Not Collectible.

If you have a tax problem that needs resolution or have years of unfiled tax returns, please call me at 203-434-5626 or email me at mikeo24@bythebooktaxes.net, I can help.