When assessing the amount it can realistically collect from an individual to pay off a tax debt, the IRS first looks at the amount the individual makes on a monthly basis, and subtracts the allowable expenses from that figure to determine the Reasonable Collection Potential.  It uses a standard list of national standards for items, such as: 1) food; 2) medical expenses; 3) vehicle costs; and/or 4) public transportation fees.  Additionally, there is a set of local standards used to calculate allowable expenses for the following costs.

Housing and General Housing Expenses

Mortgage, rent, homeowner’s insurance, renter’s insurance, phone, sewer, garbage, water, gas, electricity, and other miscellaneous costs fall under this category.  It is important to note that many households go beyond the standard funds allotted to these allowable expenses, and the IRS is quite strict about not exceeding the standard limit for these subtractions from the Reasonable Collection Potential.

Vehicle Operating Expenses

All additional costs for maintaining a vehicle fall under this heading, such as fuel, insurance, repairs, registration, and maintenance (check-ups, oil and lubes, alignments, tire rotation, etc.).  However, those submitting an Offer in Compromise may be able to claim additional fees.  In addition, vehicles with over 75,000 miles on the odometer and over 6 years old qualify for an additional $200/month that will not be available to pay off tax debt.

The Necessary Expense Test

The expenses that meet the necessary expense test requirements are charges deemed the right of United States citizens, such as health insurance, term life insurance, mandatory retirement, union dues, and dependent care.  The individual must submit accompanying documentation for each of these costs in order to subtract them from the Reasonable Collection Potential.

Conditional Expenses

These are the expenses that fail the Necessary Expense Test, but in the event that the individual may still pay off the total tax debt within a 5-year time limit, they may be allowed.  Tuition, charities, credit card payments, and other expenses are some of the most common conditional expenses.

Some of the preceding expenses may be prorated if there are other, non-liable parties living in the household who generate income, which means housing and vehicle operating fees, for example, may be determined to be shared between the individual with tax debt and non-liable parties, dropping the allowable expenses.