Tax Relief: IRS Personally Allowable Expenses
Allowable expenses are important to you if you have a tax debt with the IRS because claiming every allowable expense that you are eligible for will help you minimize the amount you pay to the IRS in back taxes. Furthermore, your allowable expense is the key to back taxes settling options, which include: Offer in Compromise, Partial Payment Instalment Agreement and Currently Non Collectible. Unfortunately, most taxpayers aren’t aware of what are allowable and what aren’t and don’t get the professional help to direct them in possibly reducing their tax debts.
What are Allowable Expenses?
The IRS looks at allowable expenses as those expenses that are necessary to meet the necessities of a taxpayer and his or her family. These needs include consideration for the welfare, health and income production for the taxpayer. An expense will be considered as allowable if it meets the necessary expense test.
Allowable Expenses Business vs Individual
Allowable expenses for businesses are different from those for individual households. The IRS sets strict limits for individual households regarding what can be claimed as an allowable expense. Businesses have more flexible limits on what can be claimed as an allowable expense but could be required to provide substantial documentation to prove these expenses.
Different Types of Allowable Expenses
Three types of necessary expenses exist; they include:
- National Standards
- Local Standards
- Other Expenses
These include food (whether home cooked or meals out), housekeeping supplies, apparel and services (clothing, laundry and dry cleaning, etc.), personal-care products, services and miscellaneous expenses (includes expenses, which do not fall under any of the other four components of the national standard). The miscellaneous expense is $100 for the taxpayer and $25 each for every other member of his or her household.
All five of these standards are included in one total national standard expense.
These standards are created from the Bureau of Labor Statistics Consumer Expenditure Survey which, as the name implies is a survey conducted to determine the average expenditure incurred by families across the nation. The survey gets information from households and families across the nation. This information includes the expenditures, income and household requirements of individuals and families across the nation.
The local standards covers two necessary expenses, which are:
- Housing and utilities
Other standards include other expenses, which may be allowed if they meet the necessary expense test, that is to say, they must provide for the health and welfare of the taxpayer and his or her family, or they must be for the generation of income for the family. The amount allotted to other expenses must be reasonable and would depend on the taxpayer’s facts and circumstances.
There will be certain expenses that will fail to meet the necessary expenses test. Some of these expenses will be allowable if the taxpayer’s tax liabilities, including his or her projected accruals, can be paid within five years. These expenses fall under the category of conditional expenses.
The IRS has the ability to authorize actual expenses rather than allowable expenses to be used by a taxpayer. This can happen if and only if the IRS determines that the taxpayer’s situation indicates that using the allowable standards will be inadequate to provide for the taxpayer and/or his or her family. That is to say, it the necessary living expenses cannot be met with the allowable expenses, IRS may allow for actual expenses. For this to apply, taxpayers have to provide enough evidence to back up their claim that using the National and local expense standards will provide them with inadequate funds to meet their essential living expenses.
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