Before accepting a settlement, the IRS takes into account your income and expenses and your equity in assets. It’s important to maximize your expenses so your income shows an inability to pay your debt. Keep in mind, however, that expenses are capped! In other words, your housing, car, food, clothing, etc., are limited depending on how many people in your household and where you live. In some cases, however, the IRS may allow you to exceed those limitations if the taxpayer proves that the standards allowed were inadequate to meet their basic living expenses. In a recent case, the US Tax Court denied the taxpayer an increase in her housing and car expenses.
Taxpayer was the sole shareholder of a corporation engaged in the commercial insurance brokerage business. The taxpayer sought an increase in her housing and car expenses. She argued that her residence was integral to her business, but the IRS found that claim was contradicted by the fact that her business reported rental expenses for two distinct office locations. Also, while she claimed that she was entitled to calculate her expenses on the basis of a 4-person household rather than a 2-person household, the IRS reasonably rejected her claim because she had only reported two people in her household on her last-filed return that the IRS had available when he made his determination.
The IRS also reasonably rejected her assertion that she needed a luxury car for work and that her $1,617 of reported monthly vehicle expenses should be allowed. The IRS found that she failed to shown any “special vehicle requirement” for her work and that a less expensive car would have been suitable.