Overview

When the IRS evaluates a taxpayer’s ability to satisfy a tax debt, it compares reported income to allowable living expenses. Those allowable amounts are the IRS Collection Financial Standards (national and local), plus documented actual costs for certain items (notably medical and certain extraordinary expenses). These standards are used for installment agreements, Offers in Compromise (OIC), and decisions about currently not collectible (CNC) status. (Source: IRS Collection Financial Standards: https://www.irs.gov/businesses/small-businesses-self-employed/collection-financial-standards)

How the IRS Categorizes Reasonable Living Expenses

  • National standards: set permitted amounts for food, clothing and other items (applies nationwide and varies by household size). (See: https://www.irs.gov/businesses/small-businesses-self-employed/collection-financial-standards)
  • Local standards: housing and utilities limits tied to county or metro area; these limits vary by location.
  • Actual expense categories: medical and dental expenses, child care, and some disability-related costs can be accepted at the taxpayer’s documented amount when supported by receipts or bills.

In my practice I’ve seen the IRS apply these standards consistently: national/local caps control most budgets, while medical bills or court-ordered payments can be approved at actual amounts if properly documented.

How the Standards Are Used (Practical Process)

  1. The taxpayer submits a collection financial statement (Forms 433-F, 433-A, or the OIC financial statement). (Forms info: https://www.irs.gov/forms-pubs/about-form-433-f)
  2. The IRS adjusts reported expenses to the Collection Financial Standards where applicable.
  3. For categories not covered by the standards (or for documented extraordinary costs), the IRS reviews receipts, billing statements, and third‑party verification.
  4. The result influences whether the IRS will accept an Offer in Compromise, allow an installment plan, or place the account in CNC.

Common Expense Categories and How the IRS Treats Them

Expense category How IRS treats it
Housing (rent/mortgage) Local standard caps; excess may be considered if documented and reasonable for special circumstances.
Utilities Covered under local housing/utilities standard.
Food & housekeeping National standard per household size (not based on grocery receipts).
Transportation Standard mileage or national transportation allowance; principal car payments and insurance may be reviewed for reasonableness.
Medical & dental Allowed at actual, documented cost when supported by records.
Child/dependent care May be allowed if documented and necessary for work or health needs.

Note: the IRS updates these standards regularly; do not rely on fixed dollar figures without checking the current Collection Financial Standards page.

Real‑World Examples (Illustrative)

  • A single parent with above‑average rent had to submit lease receipts and local rent indices to justify housing above the local standard; the collection officer accepted part of the overage because of documented local market conditions.
  • A taxpayer with chronic illness provided itemized medical bills and insurance statements; the IRS accepted the medical excess as an allowable actual expense, lowering collectible income.

Who is Affected

Taxpayers in collection (those with liens, levies, or unpaid assessments) who apply for an OIC, installment agreement, or CNC status. Self-employed taxpayers, retirees on fixed income, and low‑income households commonly rely on these standards to show inability to pay.

Practical Documentation Checklist (what to submit)

  • Recent pay stubs and proof of all income
  • Bank statements (2–3 months)
  • Lease/mortgage statements and utility bills
  • Itemized medical bills, insurance EOBs, prescription receipts
  • Childcare invoices, court orders (if applicable)
  • Completed Form 433 series or OIC financial statement

Professional Tips

  • Document everything: the IRS will accept higher-than-standard expenses only when substantiated.
  • Use local evidence for housing: lease, comparable rentals, or local rent indices help justify exceptions.
  • Reconcile bank statements to your expense schedule to avoid scrutiny for missing or inflated claims.
  • If preparing an OIC, review our guide on preparing the financial documentation for an Offer in Compromise for specifics and common mistakes: Preparing the Financial Documentation for an Offer in Compromise.

For a broader collections perspective and to assemble a complete financial snapshot, see: Preparing a Complete Financial Snapshot for IRS Collections Review. If you need step‑by‑step help preparing the form the IRS expects, review: How to Prepare a Financial Statement for IRS Collection Negotiations.

Common Mistakes to Avoid

  • Relying on verbal explanations without contemporaneous records.
  • Using outdated national/local amounts — always confirm current standards on the IRS site.
  • Including discretionary or luxury items as “necessary” living costs.

Quick FAQs

  • Can the IRS reduce my allowable expenses after I submit them? Yes. The IRS may replace claimed amounts with the Collection Financial Standards where applicable or request documentation for actual expenses.
  • What if my actual costs exceed standards? Provide thorough documentation; the IRS may allow exceptions for verifiable, necessary costs (especially medical). See the Collection Financial Standards page for current rules.

Disclaimer

This article is educational and does not replace personalized tax advice. For decisions that affect your tax account, consult a licensed tax professional or the IRS directly.

Authoritative Sources

(Information current as of 2025; readers should verify the latest IRS standards and forms.)