When you owe back taxes to the IRS and you can't afford to pay it back in full, the most critical aspect of your case is: How much can you truly afford to pay back? In order to determine the amount you can afford to pay, the IRS uses two calculations. One is the income and assets you have available to pay. The other is what expenses the IRS will allow. A taxpayer who owes money to the IRS can use necessary expenses, may be allowed conditional expenses, and may even be allowed miscellaneous expenses.
To illustrate the point, a US tax court case demonstrates that just because something is necessary to a taxpayer, does not mean that that IRS will feel the same way.
In George Thompson v. Commissioner, the taxpayer claimed two expenses that should be "allowed expenses." One was his monthly tithe (or donation) to his church, the other, his college expenses for his children. Claiming these expenses would reduce the amount he would ultimately pay back to the IRS through a partial payment installment agreement. On his Form 433a he included both expenses, and wanted the IRS to reduce his monthly payment by the amount of these expenses.
Unallowable religious expenses
So the question is, isn't tithing to the church a fundamental right of worship that can't be infringed upon? Your worship of God is but a secondary claim to the fruits your labors — or so says the IRS.
Ultimately, the court leaped to the binding conclusion that if the IRS allows people to claim religious expenses as necessary, then enforcement of the tax code will become impossible as anyone would claim an inability to pay the IRS by claiming a religious objection. “The tax system could not function if denominations were allowed to challenge the tax system’ on the ground that it operated in a manner that violates their religious belief,” claims the court.
Couldn't there be a rule on maximum tithing amount be imposed? Clearly churches need money. Money is required to exercise religion freely…there I said it. And in the case of Mr. Thompson, he wasn't trying to get out of paying all taxes, just some, subject to his obligation to his religion first.
The well-established, historical tithing amount is 10%. From the opinion, that looks like the amount Mr. Thompson was trying to claim. So why couldn't the court allow for a 10% tithe limitation — instead of nothing? Wouldn't that balance the competing interests of free exercise and raising revenue? Also, isn't our current Republic founded on the principal that certain rights come from God and can't be taken away by government?
Unallowable college expenses
Some kids are smart enough to get a free scholarship to private schools. If your kid isn't smart enough to get a free ride, should you be allowed private school education allowance when negotiating with the IRS? Mr. Thompson attempted to claim college expenses of $2,952 per month, which the court denied.
The law does deem certain education expenses permissible. Private education expenses can be allowed, provided that public education providing similar services is not available. However, in this case, the taxpayer was attempting to claim expenses for college, not secondary school. The court explains its objection:
"IRM pt. 5.15.1.10 is understandable when it is interpreted to apply only to primary or secondary schooling. Public primary and secondary schools are usually paid for by the State and local government, not the parents of the children who attend them. However, private primary and secondary schools are normally paid for by the parents of the children attending the school. Private primary and secondary schools can be expensive. The most reasonable interpretation of IRM pt. 5.15.1.10 is that a taxpayer must demonstrate that there is not a free public primary or secondary school that he could send his child to. If there were a free public primary or secondary school that could provide educational services to the mentally challenged child, then the settlement officer would not allow the taxpayer to pay tuition to a private primary or secondary school in lieu of paying the taxes he owes to the Government. We find respondent’s position that IRM pt. 5.15.1.10 applies to only expenses for primary and secondary education, and does not apply to expenses for college, to be reasonable."
So their reasoning is: If college were free but the taxpayer didn't have the ability to send their children to a free school, then, apparently, the tax court would find that expense allowable.
This seems like a rather risky reasoning to me. As of this writing, there are 12 colleges that offer free tuition in this great country of ours. Most require some sort of work or service in return…i.e. The Air Force Academy.
Let us suppose that the taxpayer's children got into West Point, and refused to go. If that were true, that would certainly make his claim that he should be entitled to this allowance for a college expense vanish. However, as everyone knows, getting into a military academy is difficult. And because of the physical demands, it is not for everybody.
So the question comes, if a taxpayer completely demonstrates to an IRS settlement officer, when attempting to negotiate tax debt through an installment agreement or an offer in compromise, that his children attempted to, but were unable to get a free college education, should he be allowed to claim education expenses for college as an allowable expense?
I say yes. But then again — my opinion doesn't matter.
Internal Revenue Manual (I.R.M.) Resources:
Installment Agreement Allowable expenses
I.R.M. Sec. 5.15.1.7 A Installment Agreement 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. There are three types of allowable expenses:
- Allowable Living Expenses – based on National and Local Standards
- Other Necessary Expenses – expenses that meet the necessary expense test, and are normally allowed
- Other Conditional Expenses – expenses, which may not meet the necessary expense test, but may be allowable based on the circumstances of an individual case.
Offer in Compromise Allowable expenses
IRM 5.8.5.20 Allowable Expenses
- Allowable expenses consist of necessary and conditional expenses, as defined in IRM 5.15.1, Financial Analysis Handbook, and further discussed below. Use the amount shown in the expense standard schedules unless that amount would result in the taxpayer not having adequate means to provide for basic living expenses. Once allowable expenses are determined, they are used to calculate the amount that can be collected from the taxpayer's future income. See IRM 5.8.5.6, above, for additional information on future
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