Dick Norton IRS Enrolled Agent - Offers in Compromise

5.15.1.10 (10-02-2012)
Other Expenses

Other expenses may be Necessary or Conditional. Other Necessary expenses meet the necessary expense test and normally are allowed. The amount allowed must be reasonable considering the taxpayer's individual facts and circumstances. Other Conditional Expenses may not meet the necessary expense test, but may be allowable based on the circumstances of an individual case.
There may be circumstances where expenses may be allowed even if they do not meet the necessary expense test. If the IRS tax liability including accruals can be paid within six years and within the CSED, all expenses may be allowed if they are reasonable. If the taxpayer cannot pay within six years, it may be appropriate to allow the taxpayer up to one year in order to modify or eliminate one or more expenses. See IRM 5.15.1.2, Analyzing Financial Information.

If other conditional expenses are determined to be necessary and, therefore allowable, document the reasons for the decision in your history.

Expense Item	Expense is Necessary:	Notes/Tips
Accounting and legal fees	The fees are for representation before the Service (i.e., to resolve current balances due, delinquent returns, examinations, etc.), or The fees meet the necessary expense test. The amount should not be excessive and must be reasonable given the complexity of the case.	Fees related to business operations (i.e., reported on Schedule C) should not be claimed as personal expenses. Fees may vary; an accountant will charge less for a wage earner with all returns filed that just needs a CIS completed, than he/she would charge for a self-employed individual that needs several returns prepared along with a CIS. Fees vary across the country so allowable amounts may also differ depending on where the taxpayer lives.
Charitable contributions (Donations to tax exempt organizations)	If it is a condition of employment or meets the necessary expense test. Example: A minister is required to tithe according to his employment contract.	Disallow any other charitable contributions that are not considered necessary. Example: Review the employment contract.
Child Care (Baby-sitting, day care, nursery and preschool)	If it meets the necessary expense test. Only reasonable amounts are allowed.	Cost of child care can vary greatly. Do not allow unusually large child care expense if more reasonable alternatives are available. Consider the age of the child and if both parents work.
Court-Ordered Payments(Alimony, child support, including orders made by the state, and other court ordered payments)	If alimony and child support payments are court ordered, reasonable in amount, and being paid, they are allowable. If payments are not being made, do not allow the expense unless the non-payment was due to temporary job loss or illness. Restitution payments made to other victims pursuant to a court order are allowable expenses.	Review the court order. Payments that are included in a state court order are not necessarily allowable (such as a child's college tuition that would not otherwise be allowable as a necessary expense.) See Exhibit 5.15.1-1, Question 15.
Dependent Care (For the care of the elderly, invalid, or handicapped.)	If there is no alternative to the taxpayer paying the expense.
Education	If it is required for a physically or mentally challenged child and no public education providing similar services is available. Education expenses are also allowed for the taxpayer if required as a condition of employment.	Example: An attorney must take a certain amount of education credits each year or they will not be accredited and could eventually lose their license to practice before the State Bar. A teacher could lose their position or in some states their pay is commensurate with their education credits.
Involuntary Deductions	If it is a requirement of the job; e.g., union dues, uniforms, work shoes.	To determine monthly expenses, the total out of pocket expenses would be divided by 12.
Life Insurance	If it is a term policy on the life of the taxpayer only.	If there are whole life policies, these should be reviewed as an asset for borrowing against or liquidating. Life insurance used as an investment is not a necessary expense.
Secured or legally perfected debts	If it meets the necessary expense test.	Taxpayer must substantiate that the payments are being made.
Credit Card Debts	Credit cards are generally considered a method of payment, rather than a specific expense. A taxpayer may be paying for necessary living expenses using cash or a credit card, e.g. food, clothing, gas, etc. Consequently, payments for the portion of the credit card debt reflecting necessary living expenses are provided for as allowable expenses under the national and local standards. It is important that taxpayers be informed of the above, and be advised that the IRS National Standards for Food, Clothing and Other Items provides an amount for miscellaneous expenses that can be applied to credit card debt. Generally, minimum payments on credit cards are allowed under the six-year rule.	If a taxpayer is paying for necessary expenses that exceed the standards, and those expenses are justified, a deviation under the expense item on Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, should be allowed. If a credit card payment is only partially allowed or not allowed at all, the taxpayer should be advised that the IRS allows an amount monthly for miscellaneous expenses that can be used to make credit card payments. See Exhibit 5.15.1-1, Questions 19-21.
Other Unsecured Debts	If the taxpayer substantiates and justifies the expense, the minimum payment may be allowed. The necessary expense test of health and welfare and/or production of income must be met. Except for payments required for the production of income, payments on unsecured debts will not be allowed if the tax liability, including projected accruals, can be paid in full within 90 days.	Examples of unsecured debts which may be necessary expenses include: payments required for the production of income such as payments to suppliers and payments on lines of credit needed for business, and payment of debts incurred in order to pay a federal tax liability.
Current Year Taxes	If it is for current federal, FICA, Medicare, state and local taxes.	Current taxes are allowed regardless of whether the taxpayer made them in the past or not.
Delinquent State and Local Taxes	Payments for delinquent state and local (county or municipal) tax liabilities may be allowed in certain circumstances: When a taxpayer does not have the ability to full pay the tax liability. When a taxpayer provides complete financial information. When a taxpayer provides verification of the state or local tax liability, and agreement if applicable	See IRM 5.15.1.10(4) and Exhibit 5.15.1-1, Question 18 for additional guidance.
Optional Telephones and Telephone Services (pre-paid long distance telephone cards/minutes or pre-paid cellular cards/minutes)	If it meets the necessary expense test.
Student Loans	If it is guaranteed by the federal government and only for the taxpayer's post-high school education. Taxpayers must substantiate that the payments are being made. Taxpayers who have student loan debt, but are unable to make payments on the debt because they are suffering an economic hardship or have medical problems, should be advised to request a deferment or forbearance of the student loan payments. The Installment Agreement (IA) amount will be established without allowing for a student loan payment. Taxpayers must be advised that if they later make arrangements to pay the student loan, they can request the installment agreement be revised.	Taxpayers with student loan debt, who have not yet made arrangements to repay the loan, should be allowed 10 days to set up a payment plan for the student loan and provide verification so the loan payment can be allowed. Additional time may be allowed if a taxpayer has extenuating circumstances. Taxpayers must be advised that if they do not respond by the due date, the IA amount will be established without allowing for a student loan payment. Taxpayers must also be advised that if they later make arrangements to pay the student loan, they can request the installment agreement be revised.
Repayment of loans made for payment of Federal Taxes	If the IRS has received the proceeds of the loan and the taxpayer can document the loan, the payment amount should be allowed.

Delinquent State and Local Taxes. Payments for delinquent state and local (county or municipal) tax liabilities may be allowed in certain circumstances:

When a taxpayer owes both delinquent Federal taxes and delinquent state or local taxes, and does not have the ability to full pay.
When a taxpayer is cooperative and provides complete financial information.
When a taxpayer advises the IRS that he/she owes delinquent state or local taxes and provides verification of the state or local tax liability, and agreement, if applicable.

Follow the procedures in this table to determine the allowable payment for delinquent state or local tax debts.

IF	AND	THEN
the taxpayer does not have an existing agreement for payment of the delinquent state or local tax debts,	provides a complete Collection Information Statement (CIS) and verification of state or local tax debts,	follow procedures in IRM 5.15.1.10(4)(b) to determine the calculated percentage amount that will be listed as the allowable monthly payment for delinquent state or local taxes on the CIS.
the taxpayer has an existing agreement for delinquent state or local tax debts, and that agreement was established after the earliest IRS date of assessment,	the payment amount on the state or local agreement is less than the calculated percentage amount,	the monthly amount due on the existing state or local agreement will be listed as the allowable delinquent state or local tax payment on the CIS. The payment to IRS will be increased by the amount allowed for the monthly state or local payment one month after the date the state or local liability is scheduled to be fully paid.
the taxpayer has an existing agreement for delinquent state or local tax debts, which was established after the earliest IRS date of assessment,	the payment amount on the agreement, is more than the calculated percentage amount,	the amount listed as the delinquent state or local tax payment on the CIS will be the calculated percentage amount. Advise the taxpayer that he/she can use the amount IRS allows for Miscellaneous expenses under National Standards to pay the additional amount due for the delinquent state or local tax payment. The payment to IRS will be increased by the amount allowed for the monthly state or local payment one month after the date the state or local liability is scheduled to be fully paid.
the taxpayer has an existing agreement for delinquent state or local tax debts, which was established prior to the earliest IRS date of assessment,	allowing the amount on the existing state or local agreement will not result in the case being reported uncollectible,	allow the existing state or local tax payment and increase the IRS payment one month after the date the state or local liability is scheduled to be fully paid. See IRM 5.15.1.10(4)(c) and (d) if allowing the state payment will result in the account being reported Currently Not Collectible (CNC) due to hardship.

Follow these procedures to calculate an allowable payment amount for delinquent state or local tax debts.

1) Determine net disposable income on Form 433-A, Collection Information Statement for Wage Earners or Self-Employed Individuals, or Form 433-F, Collection Information Statement. Do not include any amount that is being paid for outstanding state or local tax liabilities in the calculation. Net disposable income is the difference between gross income and allowable living expenses.

Note:

If the taxpayer's net disposable income is less than $25, the account should be reported Currently Not Collectible due to hardship.

2) Calculate the dollar amounts for the IRS and state or local payments based on the total liability owed to each agency (including penalties and interest to date).
3) Use the net disposable income and a percentage of IRS and state or local liabilities to total liability to calculate the payment amounts.

Example 1:

IRS Tax Liability	$10,000.00
State or Local Tax Liability	$5,000.00
Total	$15,000.00

IRS percentage	10,000.00/15,000.00 = .67
State or Local percentage	5,000.00/15,000.00 = .33

Taxpayer's net disposable income (see Note below)	$400.00

IRS Payment (400 x .67)	$268.00
State or Local Payment (400 x .33)	$132.00

Note:

If the Net disposable income is less than $25, the account should be reported CNC - hardship.

Example 2:

IRS Tax Liability	$1,000.00
State or Local Tax Liability	$500.00
Total	$1,500.00

IRS percentage	1,000.00/1,500.00 = .67
State or Local percentage	500.00/1,500.00 = .33

Taxpayer's net disposable income	$35.00

IRS Payment (35 x .67)	$23.45 (Actual IRS IA payment = $25.00)
State or Local Payment (35 x .33)	$11.55 (Actual State or Local IA payment = $10.00)

If allowing even a minimal monthly payment for delinquent state or local taxes will result in an IRS monthly payment amount of less than $25 and the account being reported Currently Not Collectible due to hardship:

AND	THEN
the taxpayer does not have an existing agreement for the delinquent state or local tax debts,	a payment for delinquent state or local taxes will not be allowed. Advise the taxpayer that he/she can use the amount the IRS allows for Miscellaneous expenses under National Standards to pay the delinquent state or local tax payment.
the taxpayer has an existing agreement for the delinquent state or local tax debts, which was established after the earliest IRS date of assessment,	a payment for delinquent state or local taxes will not be allowed. Advise the taxpayer that he/she can use the amount the IRS allows for Miscellaneous expenses under National Standards to pay the delinquent state or local tax payment.
the taxpayer has an existing agreement for delinquent state or local tax debts, which was established prior to the earliest IRS date of assessment,	the amount allowed for state or local taxes on the CIS should be reduced to allow for an IRS Installment Agreement payment of $25.00. Advise the taxpayer that he/she can use the amount the IRS allows for Miscellaneous expenses under National Standards to pay the additional amount due for the delinquent state or local tax payment. The payment to the IRS will be increased by the amount allowed for the monthly state or local payment one month after the date that the state or local liability is scheduled to be full paid.

Example:

The taxpayer’s net disposable income (not including the state or local payment) is $70. The state or local payment due on an existing agreement that was established prior to the earliest IRS date of assessment is $100. The amount allowed for delinquent state or local taxes on the CIS is $45. The payment for the IRS IA is $25. Advise the taxpayer that he or she can use the Miscellaneous allowance to pay the difference between what the IRS has allowed ($45) and what is owed monthly for the state or local payment agreement ($100), which is $55 ($100 - $45 = $55). One month after the date the state or local agreement will be fully paid at $45 monthly, increase the IRS’ IA amount to $70 monthly ($25 + $45).

Note:

Document all calculations in the case history.

Allowing payments for delinquent state or local taxes when establishing an Installment Agreement has no effect on lien or levy priorities. This guidance only impacts determinations of ability to pay. Employees should use existing procedures and lien law to determine the IRS interest in assets. If a taxpayer refuses to establish an Installment Agreement or defaults on an Installment Agreement, IRS employees should follow existing procedures and lien law to determine the appropriate course of action, including pursuing collection.
Minimal payments for delinquent state or local taxes are allowed for Installment Agreements using the six-year rule. If the six-year rule applies, taxpayers are required to provide financial information, but do not have to provide substantiation of reasonable expenses. If the taxpayer meets all other requirements for the six-year rule, the amount claimed for state or local taxes may be allowed. Employees would not be required to obtain verification of the state payment or calculate an amount due based on the percentage basis discussed above.
If a state already has a Federal/State Memorandum of Understanding (MOU) for establishing joint Federal and State agreements, follow the MOU guidelines.

5.8.3.1 (09-01-2005)
Overview

5.8.3.4 (09-01-2005)
Processability

5.8.3.4.1 (09-01-2005)
Determining Processability

Note:

Note:

Note:

IRS Policy Statement P-5-100

5.15.1.10 (10-02-2012)
Other Expenses

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Note:

Example:

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5.8.3.1 (09-01-2005) Overview

5.8.3.4 (09-01-2005) Processability

5.8.3.4.1 (09-01-2005) Determining Processability

Note:

Note:

Note:

IRS Policy Statement P-5-100

5.15.1.10 (10-02-2012) Other Expenses

Note:

Note:

Example:

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5.8.3.1 (09-01-2005)
Overview

5.8.3.4 (09-01-2005)
Processability

5.8.3.4.1 (09-01-2005)
Determining Processability

5.15.1.10 (10-02-2012)
Other Expenses