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 streaming service 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. And that can seem scary for any tax debtor.
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 with regards to back taxes.
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. Bottom line? The IRS wants to get paid. And they have the power to make your life or the life of any taxpayer a nightmare by enforcing the control they have over your money and assets until those back taxes are paid in full.
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 – aka 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 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 first things that we do with Chesapeake 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 including:
- 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 to take care of their back taxes, 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 you for personal financial information of this nature, then we should chat. You don’t want to wind up in a place where the IRS simply pigeon-holes you into the situation that is most convenient for them leaving you unable to pay other monthly bills. Go ahead and schedule a time to chat here:
We’re here to help you take care of those back taxes and get you in good standing with the IRS, and we’ll fight to make sure they don’t steamroll you.
Helping you face the man,