When a taxpayer requests an installment agreement for larger tax liabilities or proposes an offer in compromise, the IRS applies allowable expense standards. Total allowable expenses include those expenses that meet the necessary expense test. The necessary expense test is defined as expenses that are necessary to provide for a taxpayer’s and his or her family’s health and welfare and/or production of income. The expenses must be reasonable. The total necessary expenses establish the minimum a taxpayer and family needs to live and serve as the basis for granting installment agreements and offers in compromise.
As part of its new oversight program of the nation’s tax return preparation industry, the Internal Revenue Service recently announced it will send letters to approximately 100,000 tax return preparers who prepared returns in 2011 but failed to follow new requirements.