WHEN THE IRS DICTATES YOUR FAMILY BUDGET

Owing back taxes is highly structured affair with the IRS. According to IRS calculations, the cost of feeding and clothing a typical family of four didn’t change a single dime from 2020 to 2021.

It went from $1,740 per month to… $1,740 per month.

The IRS clearly missed the memo regarding pandemic inflation from their colleagues over at the Federal Reserve.

On top of that, this number applies no matter where in the country you live. From the most insanely expensive ZIP codes in America to the absolute cheapest place to live in the US -- a family of four is allowed this exact same dollar amount for food, clothing, and the catch-all “miscellaneous” category.

This weird IRS factoid is just one data point out of a much larger jumble of numbers that the IRS uses to determine whether or not a household is living beyond its means.

Back up the truck… What?

Yes, you read that correctly.

IF YOU OWE BACK TAXES, THIS IS IMPORTANT!

The IRS wants their money, but they expect you to live…frugally, so you can pay them back.

Every year, the IRS takes a snapshot of what they consider to be a middle-class lifestyle. They assign dollar amounts to specific categories, including:

• Food, clothing, personal care products, and “miscellaneous”
• Out of pocket health care costs
• Vehicle ownership and operating costs
• Rent or mortgage
• Utilities, including gas, water, electric, cell phone, Internet, and more

While these numbers are derived from federal studies, such as from the US Census Bureau and the Department of Labor, some of them would leave you scratching your head in confusion.

Even more confusing might be the regional variations for housing and vehicle operating costs. The IRS assigns these numbers at the county level, while not considering the fact that some counties can have huge variations in housing costs from one end of the county to another.

WHY SHOULD I CARE?

Now as a tax connoisseur, I find these numbers fascinating. But why should they be of any interest to you?

Well, the IRS uses these numbers, called Allowable Living Expenses, to determine how much of your income you’re allowed to spend on the basic necessities of living.

These only come into play if you owe back taxes to the IRS, and they don’t really matter that much if your tax debt is small and you’re “playing ball” with the IRS to address the situation.

But if you owe a substantial amount of money or have a history of naughty behavior with the IRS, then these definitely come into play. Once they do, the IRS suddenly has a lot of opinions regarding what you should and shouldn’t spend your own money on.

Of course, having a government agency tell you how much you’re allowed to spend on this or that is never a welcome thing and can create significant stress or even additional expense.

For example, if your existing auto lease payment already exceeds the current $533 per month limit set by the IRS, you may either be unwilling to give up your vehicle or it may simply be impractical for you to get out from under the lease and replace the car without spending a lot of extra cash these days, given the recent spike in car prices.

Or consider a housing example: If your current mortgage payment exceeds the IRS allowable amount for your family size, now is a really bad time to try buying a more affordable home. With the insanity in the housing market still going on, this becomes a “good luck with that” proposition.

DO I HAVE RECOURSE?

So, what should you do when the IRS drops the hammer and tells you that you can only spend a certain amount of money on this or that?

Well, not all hope is lost. The law allows the IRS to make exceptions to Allowable Living Expenses in certain situations. It’s also possible to make arguments to support higher expense limits. Lastly, there are times when we can convince the IRS to allow certain expenses that normally aren’t. Getting the IRS to allow such conditional expenses isn’t easy, though, and requires significant attention to detail.

If you, a relative, or a friend are facing the harsh limitations on allowable living expenses that the IRS imposes, talk to your tax pro. Professional representation goes a long way with the IRS.

Please take care of your tax mess so that you can move on with your life.

BE THE ROAR not the echo®

Warmly,

Janet Behm