When you owe back taxes to the IRS, they suddenly become interested in your personal financial affairs.
They’re going to start poking their nose into things that you’ve never seen the IRS be interested in, such as your:
• Housing costs
• Car payment, gas, and insurance
• Gas, water, electric and other utility bills
• Groceries and dining out
Why on Earth would the IRS ever care how much you spend on your cell phone plan, water bill, or Netflix each month?
It all comes down to the Allowable Living Expenses.
As soon as you become a tax debtor, the IRS automatically has a lien against everything you own, including your future income. This is a feature of federal law and is the basis for all other collection actions that the government can take against you, such as seizing money and property.
Due to that lien, the IRS legally has a say in how you spend your money. Nobody likes this, but it’s how the US tax code is written.
There is a long and complicated list of rules and factors that determine what place the IRS holds in line behind or ahead of your other creditors. The bottom line is that the IRS wants to get paid, and they have the power to make your life a nightmare by enforcing the control they have over your money and assets.
There are specific protections that prevent the IRS from taking everything – they are not allowed to put your family out on the street or force your children to starve.
This is where those Allowable Living Expenses (ALE) come in. The IRS analyzes what middle-class families spend on the following:
• Food, clothing, personal care products, etc.
• Vehicle operating costs
• Rent or mortgage
• Utilities, and more
For vehicle operating costs, housing, and utilities, they also consider regional variations in these costs. The rest are all based on national numbers. All numbers are adjustments based on family size.
These numbers “dictate” what the IRS will allow you to spend every month to live. Compared to these allowable standards, your income determines which IRS tax debt resolution programs you are eligible for.
If your income is less than the monthly ALE for your area and family size, you might be eligible for a program that allows you to pay the IRS nothing. Yes, nothing. Zero. Nada. Zilch.
If your income is also less than the monthly ALE they calculate for you, but you have assets – such as lots of equity in your home, stocks, bonds, classic cars, crypto, or the world’s most valuable Beanie Baby collection – then they’re going to consider the value of those assets. But, in such a situation, you may settle your tax debt for less than what you owe, and walk away from the rest.
If your income is more than the ALE calculation, the IRS will consider that “excess” income for a reduced settlement. If you’re not eligible for a reduced settlement – which most people are not – then this “excess” income becomes the monthly payment the IRS wants to see from you every month.
One of the things that we do with clients when they hire us to help them with a tax debt problem is to conduct the exact same detailed financial analysis that the IRS will do. We do this for many reasons, such as:
1. Determining which IRS programs you’re eligible for.
2. Seeking opportunities to legally increase the ALE numbers for you.
3. Looking for unique circumstances that could open doors to outside-the-box resolution options.
This financial analysis is crucial to get the best possible deal for you. Since most tax debtors will end up on a monthly payment plan to the IRS, our job is to help you get the smallest possible monthly payment and minimize the short-term financial impact on your budget.
If you’re in a situation where the IRS is hounding you for personal financial information of this nature, then we should chat. You don’t want to wind up in a situation where the IRS simply pigeon-holes you into the situation that is most convenient for them, leaving you unable to pay other bills.