The IRS Collection Financial Standards are intended for use in calculating repayment of delinquent taxes. That is, they are used to evaluate a taxpayer's ability to pay delinquent taxes. In essence, the standards estimate a taxpayer's expenses to determine how much of their income is available to allocate towards taxes. In the past, the criteria used by the IRS to evaluate a taxpayer's ability to pay were based on national averages. But of course, costs of living vary from state to state, from county to county, and even from locality to locality. In this respect, the IRS has historically ignored known disparities in costs of living when evaluating ability to pay. For instance, a taxpayer living in New York City would be deemed to have the same living expenses as a taxpayer living in rural Wyoming. In essence, a taxpayer's expenses turned solely on family size with no other variables coming into play. This method for evaluating a taxpayer's ability to pay taxes has troubled me since my first day in the practice of tax law.
When I say that this has troubled me since my first day as a tax practitioner, I mean literally my very first day. The first tax matter that I handled was an innocent spouse petition. The case involved a woman whose former husband failed to report some serious income. Of course, as most married couples do, the couple filed joint tax returns during their marriage. Also, as is the case with many married couples, this woman signed a tax return prepared by her spouse without reviewing or understanding its contents. And no one can blame her for that. After all, marriage is a relationship of reciprocal trust. But as it turned out, her husband failed to adequately disclose income on the tax return. Sounds precisely like the type of situation for which the innocent spouse provisions are designed to provide relief ... unless you're the IRS.
Unfortunately, our innocent spouse petitions weren't well-received by the IRS. The IRS imputed knowledge of the unreported income to this woman by virtue of her signature on the couple's joint income tax return and was unwilling to deviate from this position notwithstanding the circumstances. That led to plan B: offer in compromise. Part of the offer in compromise process involves completing IRS Form 433-A. On this form, the taxpayer provides information regarding his or her income and expenses so that the IRS can evaluate the ability to pay tax. This is where the Collection Financial Standards come in.
Of course, one of the things South Florida is known for is a high cost of living. As a result of the IRS' national standards, however, the maximum expenses that the woman was allowed to report were substantially below her actual expenses. How is this an accurate reflection of a taxpayer's ability to pay delinquent taxes?
The good news is that the IRS recently issued new Collection Financial Standards. Significantly, these new standards take geographic disparities in costs of living into account, at least in part. For instance, under the new standards, the maximum allowable car or lease payment for a taxpayer living in Miami is $346. In this respect, Broward County (e.g., Fort Lauderdale) is included in the Miami region. The remaining counties in the state, however, fall into the broader "South Region" for which the maximum allowable car ownership expense is capped at $244. The propriety of drawing this $102 line at the Broward-Palm Beach County line is questionable, but the line has to be drawn somewhere, and any type of line-drawing will necessarily be arbitrary to some degree. Still, the perceived benefits of a bright-line standard like this typically outweigh any arbitrariness. In any event, these local standards are a significant improvement from the previous one-size fits all national standards. From this perspective, although the $244 maximum allowable car ownership expense for the South Region is $102 less than the $346 allowed for taxpayers in Broward and Miami-Dade Counties, it is, nevertheless, $52 more than that allowed for taxpayers in Seattle, $32 more than that allowed for taxpayers in the Midwest Region, and $28 more than that allowed for taxpayers in the Minneapolis-St. Paul area. Thus, while the new local standards may not be completely accurate in all circumstances, it does reflect disparities in costs of living.
In addition, the newly issued standards include comprehensive local standards for costs of housing and utilities. In this respect, the maximum allowable expense is computed on a county-by-county basis. The maximum allowable expense for housing and utilities for one person in Broward County is $1,719. The maximum allowed in Miami-Dade County is $1,676, and the maximum allowed in Palm Beach County is $1,710.
Note, however, that inaccurate national standards continue to govern the maximum allowable expenses for food, clothing, personal care products (e.g., cosmetics, toothpaste, etc.), and health insurance costs. In this respect, an individual is allowed a maximum of $300/month for food, $86/month for clothing, and $32/month for personal care products. To illustrate the inadequacy of these national standards, consider that a taxpayer living in Broward or Miami-Dade County is allowed to allocate more monthly income to a car lease payment than to food. But hey, no one has ever accused the IRS of being a picture of logic. To be sure, the new local standards represent with respect to transportation and housing expenses represent a significant improvement. But there's still a long way to go.