IRS Form 433-A or 433-F: Organize your financial information

Every option in Part III runs on the same fuel, and the fuel is a document the IRS calls a Collection Information Statement. You probably know it by its form number. For most people dealing with the automated collection system, it is Form 433-F. For people working with a revenue officer, it is the longer Form 433-A. For an Offer in Compromise, it is a version called 433-A (OIC), and businesses add Form 433-B.

They all ask the same three questions. What do you own? What comes in each month? What has to go out each month? From those three answers the IRS derives two numbers, and the two numbers decide almost everything: whether you get a payment plan and how big the payments are, whether you qualify for hardship status, whether an offer has any chance and for how much, and whether a levy gets released.

So this chapter is about building those answers honestly and well. I call it the X-ray because that is what it is. It shows the IRS the inside of your finances. It also, if you do it right, shows you, and most people have never looked.

The two numbers

The first number is your monthly disposable income. Take everything that comes in each month. Subtract what the IRS allows as necessary living expenses. What is left is what the IRS believes you can pay each month. If it is positive, you are looking at a payment plan. If it is zero or negative, you are looking at hardship status. The size of the number sets the size of the plan.

The second number is your net realizable equity. Take everything you own. Value it the way the IRS values it, which is at a discount for the fact that a forced sale brings less than a fair one. Subtract what you owe against each item. Subtract the exclusions the IRS allows. What is left is what the IRS believes it could get if it took everything. This number matters most for an Offer in Compromise, where it is added to a multiple of your disposable income to produce the minimum the IRS will accept.

Two numbers. Everything else in the form is detail feeding them.

What you own, the way the IRS sees it

Cash and bank accounts. The balance on the day you sign, from the statements you attach. For an offer, the form lets you subtract a small cushion so that you are not counted as able to pay money you need for next week's groceries; the amount is printed on the current form. For a payment plan, the IRS looks at whether you have a lump sum sitting there and may ask you to apply it.

Vehicles. Fair market value, which the IRS will check against a pricing guide, reduced to 80 percent for a quick sale, minus the loan balance. For an offer, there is a further per-vehicle equity exclusion, a few thousand dollars, so that an ordinary car with a modest amount of equity contributes nothing. A paid-off truck worth $30,000 contributes a lot.

Your home. Fair market value, which you can support with a recent appraisal, a tax assessment, or comparable sales, reduced to 80 percent, minus the mortgage. Robert's house, worth about $340,000 with no mortgage, has a quick-sale value of about $272,000, and that entire amount is equity. Linda's, worth about $280,000 and also paid off, comes to about $224,000. Jennifer rents. Michael has about $40,000 of equity after the 80 percent haircut and his mortgage.

Retirement accounts. Counted. For an offer, the IRS reduces the value by the taxes and penalties you would pay to withdraw, but the rest is on the table. For a payment plan, the IRS can and sometimes does ask whether you can borrow from or withdraw against a retirement account to pay. This surprises people. It is one of the reasons to understand the form before you fill it out: a 401(k) with $90,000 in it changes the conversation whether or not you intended to touch it.

Life insurance with cash value, investments, business interests, money owed to you, anything else of value. All listed, all valued. The IRS has access to property records, motor vehicle records, your own prior returns, and the same financial information reporting that found your income in the first place. It can also summon your bank records. Leaving an asset off the form is not a strategy. It is a false statement on a document signed under penalty of perjury, and when it is discovered, it ends whatever agreement it supported.

What comes in

All of it. Wages, before withholding, from pay stubs. Self-employment income, averaged over a representative period, from a profit and loss statement. Pensions, Social Security, rental income, alimony, child support received, interest, dividends, distributions. Money a family member gives you regularly.

If you are married and your spouse is not liable for the tax, as when the debt is from a year before the marriage or from a separate return, the IRS still asks about the spouse's income. It does not count it toward what you can pay, but it uses it to allocate household expenses. If you earn 40 percent of the household income, the IRS will generally allow you 40 percent of the household expenses. People find this intrusive. It is also how the math has to work if the expenses you claim are shared.

For the self-employed, the income figure is the one the IRS will scrutinize hardest, because it is the one most under your control. Use the same figures your tax returns show. If this year is worse than last, document why. Michael's income for the form was his average net profit over the last twelve months, supported by bank deposits, and it was lower than the year before because of the levy itself, which is a legitimate thing to show.

What goes out, and the part people get wrong

This is where the form departs from your checkbook. The IRS does not allow your actual expenses. It allows necessary expenses, and for several categories it caps them using published figures called the Collection Financial Standards. The standards are updated every year, and the current ones are on IRS.gov. The categories work like this.

The National Standard for the first category, for a single person, has been in the range of $800 to $900 a month in recent years, and goes up with household size. The housing standard varies enormously, from under $1,500 in some rural counties to several thousand in high-cost metropolitan areas. The vehicle ownership standard has been in the $600 range per car.

A word about where these numbers come from, because it changes how you should feel about them. The National Standards are derived from the Bureau of Labor Statistics Consumer Expenditure Survey, which measures what American households actually spend. The IRS takes a point on that distribution, generally around the median for food and household items, and calls it necessary. The housing and transportation standards come from census and other federal data by county. So the standards are not a bureaucrat's guess about frugality. They are a statistical description of how a middle-of-the-road household in your county lives, with the top half trimmed off.

That tells you two things. If you live above the standards, the IRS is not accusing you of extravagance; it is saying that a typical family in your county manages on less, and so, for the duration of your tax problem, can you. And if you live below them, you are entitled to the standard anyway, which is the system quietly acknowledging that people in tax trouble are often living on less than it would ask of them. Take the allowance. It is the one place on the form where the rules are built to give you room.

Two consequences follow, and both catch people.

First, if your actual housing costs more than the standard for your county, the IRS allows only the standard, and the excess is treated as money you could be paying the IRS. A $3,200 mortgage in a county with a $2,100 standard produces $1,100 of disposable income on paper that you do not have in practice. More proposed payment plans come back higher than expected for this reason than for any other.

Second, if your actual costs are below the standard in the no-receipts categories, you get the standard anyway. Someone who spends $500 a month on food and household items and is allowed $850 has $350 of breathing room the form will not show. That is legitimate, and you should take it.

The two exceptions that soften the standards

For payment plans, not offers, the IRS has two rules that let you keep your actual expenses even when they exceed the standards.

The six-year rule: if your proposed plan would pay the full balance within six years, and within the collection period, the IRS will generally accept your actual necessary expenses without applying the standards at all. You still cannot claim credit cards or tuition, but your real mortgage and your real car payment stand. For someone like Michael, whose income supports a six-year payoff, this means the housing cap never bites.

The one-year rule: if your plan would take longer than six years and your expenses exceed the standards, the IRS can allow the actual expenses for up to one year to give you time to adjust, after which the standards apply. In practice this means a year to sell a car with a payment you cannot sustain, or to move.

Neither rule applies to an Offer in Compromise. In an offer, the standards are applied strictly, and the room to argue is limited to what the IRS calls special circumstances, which Chapter 10 covers.

Robert's X-ray

One worked in full, because the shape of the result is what matters.

Robert's income is $2,100 a month from part-time bookkeeping work for two small businesses. He is single, 61, no dependents, and his house is paid off.

His allowable expenses, using approximate standards for his county: food, clothing, and miscellaneous at the National Standard, about $850. Out-of-pocket health care, about $80. Housing and utilities: his actual cost is property tax, insurance, and utilities, about $720, well under the county standard, so he is allowed his actual $720. His car is a fourteen-year-old sedan with no loan, so no ownership cost, and operating costs at the regional standard, about $280. Health insurance through the marketplace, $390. Total allowable: about $2,320.

Income $2,100, expenses $2,320. Disposable income: negative $220.

That is the first number, and it says Robert cannot pay anything monthly. He is a Currently Not Collectible case on income.

The second number is where his house sits. Net realizable equity: $272,000 on the house, about $1,800 in the bank, a car worth $4,000 that is wiped out by the vehicle exclusion. Call it $274,000. Against a $118,000 debt.

That second number says an Offer in Compromise based on inability to pay is not available to him, because the IRS computes the minimum acceptable offer as equity plus a multiple of disposable income, and his equity alone is more than twice the debt. The 2020 offer that cost him sixteen months of collection statute was never going to be accepted, and anyone who had read his form knew it.

What the X-ray tells Robert, then, is exact. He qualifies for hardship status. He does not qualify for a compromise based on collectibility. A lien on the house is likely. The clocks run to 2029 and 2030. If he sells the house before then, the IRS gets paid from the sale. If he does not, the debt expires. He can live with that. He now knows it, with numbers, instead of hoping.

Linda's X-ray, briefly

Linda's income is $2,550, from Social Security and her pension. Her allowable expenses, with the higher health care standard for someone over 65, prescriptions she can document, and a house that is paid off, come to about $2,500. Disposable income near zero. Equity about $224,000 in the house and very little else.

Same shape as Robert, with two differences that will matter in Part III. Her CSEDs are eight years out, not three, so waiting is a much longer road. And she is 68 on a fixed income, which is exactly the profile for a third kind of offer, called effective tax administration, where the IRS can accept less than it could theoretically collect because collecting it would require a retiree to sell her home. Chapter 10. Her daughter, who has read ahead, has already circled it.

Michael's X-ray, briefly

Michael's is a business form and a personal form together. His average net business income, after the levy damage, is about $7,400 a month. His household expenses, with a wife who earns $3,100 and two kids, allocate to him at about $6,100 under the six-year rule because the plan will pay out within six years. Disposable income about $1,300. Equity about $40,000 in the house and $25,000 in equipment and vehicles after the haircuts and exclusions.

His first number says he can pay about $1,300 a month. On $86,000 that covers the principal in about five and a half years, but once interest and the reduced penalty are added it stretches closer to eight, which runs past the collection deadline on his oldest year. That gap is a problem with a solution, and solving it is what Chapter 9 is about. He is an installment agreement case.

How to fill it out so it holds up

A few rules from watching people do this badly.

Attach what the form asks for: three months of bank statements for every account, recent pay stubs, the last filed return, proof of the expenses you claim in the actual-cost categories. The IRS will ask for them anyway. Sending them with the form saves a round trip of two months.

Match your returns. If your return says you made $71,000 and your form says $52,000, you will be asked to explain, and the explanation had better be good.

Do not list credit card payments as necessary expenses. They will be struck, and the IRS will wonder what else to strike.

Do not inflate housing. It gets capped at the standard unless the six-year rule applies, and an obviously inflated figure costs you credibility on the figures that are not capped.

Do not leave off the account you forgot about, the car in your name that your kid drives, or the small brokerage account from a job three employers ago. They are findable, and a found omission can void an agreement or an accepted offer years later.

Do write down the standards you used and where you got them, and keep a copy of the completed form. You will fill this form out again. Circumstances change, agreements get renegotiated, and the IRS asks for updated financials every couple of years on longer plans. The second time should take an hour.

And sign it knowing what the signature means. It is a statement under penalty of perjury. Everything in Part III is built on it. If it is honest and complete, it will carry weight with every IRS employee who reads it, and it will protect you if your case is ever reviewed. If it is not, it is the weakest point in your entire case, and the one most likely to be found.

That is the end of Part II. You know whether the number is right. You know what waiting costs and when it pays. You know how long the IRS actually has. And you have the two numbers that every exit is priced in.

Now the exits.