We often don’t think about how our smaller, regularly scheduled and day-to-day expenses may impact our financial condition. When something becomes routine, it becomes easy to forget. However, all these expenses can go under the magnifying glass when you owe money to the IRS. When you owe back taxes to the IRS, they suddenly become very 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
…and much more.
Why on Earth would the IRS ever care how much you’re spending on your cell phone plan, water bill, or Netflix each month?
It all comes down to the Allowable Living Expenses.
The moment you become a tax debtor, the IRS has an automatic lien against everything you own, including your future income. This is a feature of federal law, and it’s the basis for all the 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, obviously, but it’s the reality of how the US tax code is currently written.
There is a long and complicated list of rules and factors that go into determining what place the IRS holds in line behind or ahead of your other creditors, but the bottom line is that the IRS wants to get paid, and they have power to make your life a nightmare by enforcing the control they have over your money and assets.
It’s not all bad, however. There are specific protections that exist to prevent the IRS from taking everything you have. In simple terms, the IRS is not allowed to make you destitute. In other words, 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 does an analysis every year of what middle-class families spend on the following broad categories:
- 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
For vehicle operating costs, housing, and utilities, they do take into account regional variations in these costs. The rest are all based on national numbers. All the numbers also have adjustments based on family size.
These numbers “dictate” what the IRS will allow you to spend every month to live. Your income, when compared to these allowable standards, is what determines which IRS tax debt resolution programs you are eligible for.
If your income is less than the total 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 total 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 take into consideration the value of those assets, too. But, in such a situation, you may be able to 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, then the IRS is going to take that “excess” income into consideration 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 first 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 a number of reasons, such as:
- Determining which IRS programs you’re eligible for.
- Seeking opportunities to legally and ethically increase the ALE numbers for you.
- Looking for unique circumstances that might open doors to outside-the-box resolution options.
This financial analysis is crucial for us to be able to get the best possible deal for our clients. Since the vast majority of tax debtors will end up on a monthly payment plan to the IRS, our job is to help get you the smallest possible monthly payment and help you minimize the short-term financial impact on your budget.
If you’re in a situation where the IRS is hounding your 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 monthly bills. Just schedule a time to chat here:https://paragontaxsolutions.net/contact-us/
Paragon tax solutions has an excellent team of professionals ready and waiting to aid in situations just like this. We’re here to help you get your life back.