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MSP #13: 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

TAS Recommendations and IRS Responses

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1.

TAS RECOMMENDATION #13-1

In conjunction with TAS, consider the family budget or self-sufficiency standard as an alternative method to calculate the cost of providing for the health and welfare of households. The alternative method should not be a cap to allowable expenses, but should represent the floor for what can be claimed.

IRS RESPONSE TO RECOMMENDATION: In response to the NTA’s report to Congress in 2005, IRS considered the use of self-sufficiency standards as an alternative to the ALE.  IRS determined that the data did not meet standards of accuracy, cover a sufficient geographic area, are not collected regularly, and are not generally accepted as reliable.  In addition, the self-sufficiency standard reports for the various states use a variety of state and local sources and lack the consistency needed to ensure nationwide consistency and fairness. In discussions with TAS regarding decreases in the ALE for 2016, IRS agreed to consider other sources for use in calculating the ALE.

Where practicable for the taxpayer and the IRS, no substantiation is required for some expenses unless the monthly amount exceeds the national level.  This includes public transportation for the purchase of bus tokens, subway passes, out-of-pocket health care costs for medication, doctors, dentists, and food, clothing, and household supplies for the purchase of numerous personal and household items. For an automobile loan/ lease or mortgage/rent amount, where the expense can vary significantly and substantiation would be less cumbersome, documentation is required in some cases. 

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate understands that it will not be easy finding an alternative to the current ALE standards that is both sufficient for taxpayer needs and consistent for all taxpayers. She invites the IRS to join her in researching and considering other sources for calculating the ALE standards.

The National Taxpayer Advocate appreciates that in some instances the taxpayer does not have to provide documents to substantiate a given expense. However, the allowed amount serves as a cap on the expense, when we know that some taxpayers will pay more and some will pay less because the ALE standards are based on average expenditures. Second, in many cases taxpayers will forego one expense in order to pay for a more immediate or costly expense. The current system is not always reflective of a taxpayer’s true financial situation, making it difficult to substantiate.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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2.

TAS RECOMMENDATION #13-2

Expand the standard to include additional expenses for basic technology in the household, child care, and retirement savings.

IRS RESPONSE TO RECOMMENDATION: The 2007 redesign of the ALE included the addition of cell phones as a utility expense.  In addition, in October 2011, new Housing and Utilities standards were released which included an allowance for cable television and internet services. The National Standards include a miscellaneous allowance, which was increased in 2007. It was established for living expenses not included in any other standards or allowable expense items and can be used to purchase a computer or tablet.

IRS did consider a child care standard in 2007, however the data available was not adequate to establish a standard. Child care costs vary widely by type (nanny, babysitter, au pair vs daycare center or home-based). Families may need different amounts depending on parents’ work schedules and other factors such as a child’s age and time spent in child care. Child care is an allowable expense when necessary to provide for a taxpayer’s and their family’s health and welfare and/or production of income. Discretionary retirement savings are not a necessary current living expense while the taxpayer is repaying past due taxes.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The current ALE standards are out-of-date and as a result, do not reflect all expenses necessary to maintain the health and welfare of households today. The National Taxpayer Advocate does appreciate that it may be challenging to develop a way to measure all necessary expenses, to include childcare, basic technology in the household, and retirement savings. However, until the IRS has a system that includes these basic expenses, the ALE standards will not truly reflect what it costs to maintain the health and welfare of households today. These taxpayers will be susceptible to IRS collection action that otherwise would be avoided due to financial harm.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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3.

TAS RECOMMENDATION #13-3

Reconsider the recent decrease in ALE standards for national standards, out-of-pocket healthcare, housing, and transportation.

IRS RESPONSE TO RECOMMENDATION: Between 2007 and 2015 there were no decreases to the ALE standard amounts.  In 2016, after a thorough and collaborative review of the standards, the need to adjust the amounts based upon actual data resulted in a decrease in the ALE in some categories.  Between 2007 and 2015 there were no decreases to the ALE standard amounts.  In 2016 after a thorough and collaborative review of the standards, the need to adjust the amounts based upon actual data resulted in a decrease in the ALE in some categories.  Since there were no decreases in the standard amounts for eight years, there was a wide variance between the actual data driven standard amount for some expenses and the amount that IRS had published. Rather than drastically reduce the standard amount for those expenses in 2016, the IRS capped the decrease to a portion of the gap in an effort to minimize impact on the taxpayer. The standards will be evaluated annually based on current national data.

CORRECTIVE ACTION: N/A

TAS RESPONSE: TAS is unable to confirm that the categories in the ALE standards have decreased. If anything, our research shows that costs to live are increasing. Since the IRS relies on average expenditures, we are not aware of a way to test the IRS’s decision to decrease ALE standards. As it is now, the IRS is basing its decision to decrease ALE standards on data that shows taxpayers are spending less. It does not mean that the costs of these goods and services are decreasing. In the last few years, taxpayers have felt the effects of the Great Recession, with high unemployment and underemployment. People who did not have the money to spend on necessary expenses resorted to foodbanks and other resources. Since our research shows that costs are going up, it is possible that taxpayers are simply trying to do more with less. To use this data to justify lowering the necessary and basic living expenses and thus obtain a tax payment, perpetuates the dire financial straits taxpayers found themselves in during the recession and the years after it.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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