Most Serious Problem: Allowable Living Expense (ALE) Standards

The IRS’s Development and Use of ALEs Does Not Adequately Ensure Taxpayers Can Maintain a Basic Standard of Living for the Health and Welfare of Their Households While Complying With Their Tax Obligations

Internal Revenue Code (IRC) § 7122(d)(2)(A) mandates that the IRS develop allowances designed to provide that taxpayers entering into an offer in compromise have an adequate means to provide for basic living expenses. The resulting Allowable Living Expense (ALE) standards have come to play a major role in IRS collection cases. However, the current standards are based on outdated measurements and are implemented in a way that keeps some taxpayers in or near poverty in order to meet their taxpayer obligations.

In its efforts to base the allowed expenses on reliable and consistent data, the IRS relies heavily on the Consumer Expenditure Survey (CES), which gathers expenditure information for consumers. Since this survey measures what people spend on average to live, it does not take into account what the goods or services actually cost to live. This system does not recognize that taxpayers of limited means may forego otherwise necessary expenses.

Furthermore, spending is not consistent over income levels. While housing costs now account for about 25 percent of a family’s pre-tax income, some low income renters may spend up to half of their pretax income on rent. The standards are also out of date. There is no standard allotment for child care expenses, and no allotment at all for basic digital technology or retirement savings. There are alternative methods to measure the cost of maintaining the health and welfare of a household. These alternative methods provide better insight into necessary expenses and also establish the expenses as a floor rather than a cap.

Read the full discussion

Related Content of the Report:

Volume 2: The Importance of Financial Analysis in Installment Agreements (IAs) in Minimizing Defaults and Preventing Future Payment Noncompliance

Volume 2:
IRS Should Use Its Internal Data to Determine If Taxpayers Can Afford to Pay Their Tax Delinquencies

Read All Most Serious Problems