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The IRS has issued guidelines for allowable expenses, which
include necessary and conditional expenses.2 “Necessary expenses
are those that meet the necessary expense test; i.e., ‘they must
provide for a taxpayer’s and his or her family’s health and
welfare and/or the production of income’ and they must be
reasonable.” Schulman v. Commissioner, T.C. Memo. 2002-129 n.6.
There are three types of necessary expenses: (1) Those based on
national standards; i.e., food, housekeeping supplies, clothing,
and personal care products and services; (2) those based on local
standards; i.e., housing, utilities, and transportation; and (3)
other expenses, which are not based on national or local
standards. Id. Conditional expenses are allowable if the tax
liability, including projected accruals, can be fully paid within
5 years. Id.; 2 Administration, Internal Revenue Manual (CCH),
sec. 5.15.1.10, at 17662, 17664.3 A conditional expense may also
be allowed for up to 1 year if it meets the necessary expense
test and the taxpayer is unable to pay the tax liability within 5
years. Schulman v. Commissioner, supra; 2 Administration,
Internal Revenue Manual (CCH), sec. 5.15.1.10, at 17662, 17664.
2 The guidelines are published on the IRS’s Web site at
http://www.irs.gov/individuals/article/0,,id=96543,00.html (last
visited Nov. 21, 2007). The amount listed as the national or
local standard is effective as of Oct. 1, 2007.
3 As a general rule, provisions within the Internal Revenue
Manual are not binding on the IRS and convey no rights on
taxpayers. See First Fed. Sav. & Loan Association of Pittsburgh
v. Goldman, 644 F. Supp. 101, 103 (W.D.Pa. 1986).
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Last modified: March 27, 2008