In general, the IRS appears to take a cynical view at people’s cost of living, and can be fairly judgmental about how we spend our money. This cynicism obviously increases dramatically the moment you have an outstanding tax debt.
Before delving into specifics, I’d like to make two points regarding the IRS personnel you’d normally be discussing your personal finances with. First, IRS field personnel such as Revenue Officers and Settlement (Appeals) Officers typically have higher salaries than the IRS National Standards for the areas in which they are assigned. In other words, even as public servants, they make more money than their own standards set for a middle class lifestyle.
Second, keep in mind that these people are public servants. In fact, most senior IRS personnel are lifetime bureaucrats, meaning that they have never had to work in the private sector. Some senior Revenue Officers, Revenue Agents (Auditors), and Settlement Officers have actually never worked a day in their lives outside of the government, and don’t even have finance or accounting backgrounds.
Combining these two things, you can see that it’s very possible that the IRS person you are explaining your finances to has an interesting view on the world: They’ve always made an above average salary, and lack any personal experience running a business or dealing with the reality of private sector employment. This skewed perspective becomes readily apparent in talking to senior IRS personnel if you’re a middle class taxpayer or “mom and pop” small business owner.
Now, with that said, let’s talk about the IRS National Standards. The government uses national and local cost of living data to establish norms for the cost of living across various categories. Some cost of living standards are the same for everybody, while others, such as housing and transportation, are adjusted by region.
These standards are based entirely on the government’s definition of a middle class existence. In other words, for purposes of determining how much of your income the IRS expects you to fork over in monthly payments on a tax debt, they only allow you to claim a middle class lifestyle.
It is not uncommon for me to have a conversation with a client where I’m explaining this, and they get frustrated. When you’re in IRS collections, they don’t like seeing that you’re making $1500 per month car payments on a Hummer and a Corvette, or have two people living in a 4200 … Continue reading