The Collection Financial Standards, the measures used by the Internal Revenue Service in negotiating installment agreements and offers in compromise, have been stuck in a time warp, according to observers."They haven't been updated since January 2006," observed New York-based attorney and CPA Michael Breslin, managing partner of FullServe Group LLC. "It has affected our ability to negotiate and it mandates higher amounts that are not fair. These numbers are based on 2005 figures and they were issued in early 2006."
The IRS uses the Collection Financial Standards to help determine a taxpayer's ability to pay a delinquent tax liability. Allowances for food, clothing and other items comprise the National Standards, which apply nationwide except for Alaska and Hawaii, which have their own tables. Taxpayers are allowed the total National Standards amount for their family size and income level, without questioning amounts actually spent.
Maximum standards for housing and utilities and transportation, know as the Local Standards, vary by location. Unlike the National Standards, the taxpayer is allowed the amount actually spent or the standard, whichever is less.
"It makes a significant difference if you're trying to negotiate an offer in compromise and you use the old standard," said Robert Brennan, CPA and a director in the Litigation Department at the Philadelphia office of CBiz. "If you have necessary living expenses of $3,500 based on the 2006 figures, and your income was $4,500, they take the $1,000 difference and multiply it by 48 and say that that's your future stream of earnings component for your offer," he said. "They then add an equity component for your assets. But that $3,500 is based on last year's cost."
"Say in 2007 your necessary living expenses increased with inflation, and instead of $3,500 it's now $4,000," he said. "$500 times 48 is $24,000, so it makes a huge difference for someone trying to negotiate an offer."
"It's more difficult for clients to come up with a reasonable, payable offer in compromise, especially when not only the National Standards, but also the local housing, utility and transportation standards have not been updated," said Bill Wandel, EA, CPA and a licensed taxpayer representative at Charleston, S.C.-based JK Harris & Co. LLC.
Even if the IRS were to revise the standards immediately, offers still in the pipeline would continue to be negatively affected, he said. "The turnaround time has decreased from two years to six months, so unless new standards are implemented during the offer evaluation stage, last year's figures will apply."
An IRS spokesperson confirmed that the agency is still "in the process of reconsidering the status of the Allowable Living Expense structure, and will issue revised tables as soon as deliberations are completed."
HOW IT HURTS
"It's resulted in people paying higher installment agreements and paying higher amounts for offers in compromise using standards that are clearly out of date - it's just wrong," said Marty Davidoff, tax liaison chair of the American Association of Attorney-CPAs, which sent the IRS a letter on the subject. "It's one thing for them to say we're changing some of the factors, and they are - for example, adding in cell phone expenses. I applaud that, but in the meantime they should give directions to their employees to add the inflation factor to the national, regional and local standards."
"We brought this to their attention in March, but they communicated back to us that nothing would be happening. They made a corporate decision not to do anything," he said. "They're no longer trying to do what's right and fair, they're just doing what they want to do."
"Even when they do come out with new standards," Davidoff noted, "we believe that some form of relief should be granted to taxpayers who have submitted an offer in compromise during 2007 and were rejected because their allowable expenses were evaluated using the 2006 standards."
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