Blog

Being in debt to the IRS can be stressful, particularly if the debt is a great deal more than you can pay off at once. The bad news is that the IRS isn’t always prepared to have a taxpayer pay the entirety of his or her tax debt at one time. The agency may allow you to enter into an installment agreement, a temporary collection delay, or an Offer in Compromise, depending on your financial situation.

However, how does the IRS determine what you can afford?

Typically, it depends on your income, how much you can afford monthly, assets, debts, household situations, and how long it will take you to pay it off. If a thorough financial statement is needed, the IRS may ask for a Collection Information Statement, including Form 433-A (Form 433-F for Trustees of Estates and Form 433-B for the owners of unincorporated businesses).

The IRS basically wants to find out how much reasonable money is available, after taking into account the costs of living.

A simplified version of the calculation is:

Determine the monthly income – the monthly expenses already paid = the monthly housing payment potential

But the calculation may be more complex, since the IRS also takes into account assets and other financial factors.

The IRS, for instance, has a notion called Reasonable Collection Potential (RCP) that it applies to an Offer in Compromise. The value of assets plus future income, minus allowable living expenses, is generally recognized as the value by RCP.

So if you have a lower-than-normal monthly surplus, it doesn’t mean that the IRS will overlook large equity in your home, bank accounts, car, investments, or other assets.

1. The IRS Takes A Look at Your Income

First, the income of the household.

The IRS may include income as:

• Wages and salaries
• Income from self-employment or from a business activity
• Commissions and bonuses
• Interest and dividends
• Rental income
• Pension income
• Social Security
• Retirement distributions
• Other recurring income

The current Form 433-A, for instance, covers investments, including wages, interest and dividends, net business income and other income.

It may be harder to determine your ability to pay if you are self-employed, and the IRS may look at your business income and expenses separately.

If a taxpayer makes $10,000 in a month, it doesn’t always mean that they have $10,000 to pay the IRS in a month.

Some of the required expenses the IRS takes into account before calculating how much of income can be used to pay taxes.

1. Allowable Living Expenses Are Extremely Important

The allowable expenses form a crucial component of an IRS financial analysis.

IRS Collection Financial Standards are a set of tools that are used to help the IRS decide if a taxpayer can pay delinquent taxes. The existing standards are effective June 29, 2026.

The standards have sections on:

• Cost of food, clothing, and other items
• Housing and utilities
• Transportation
• Health care
• Some of the other essential expenses.

An allowable living expense is an expense that satisfies the necessity test of the IRS, which is usually an expense necessary for the taxpayer’s or family’s health, welfare, or production of income.

Many people mistakenly believe that the IRS automatically approves all the expenses on their tax budget.

That’s not necessarily true.

The IRS could compare your expenses against national or local standards. In some cases, the agency can approve actual expenses, especially if the expense is required and the rules permit it.

Data from the Bureau of Labor Statistics Consumer Expenditure Survey are used to create the 2026 national standards for food, clothing, and other items, among others.

1. Impacts of Housing and Utilities

Another major factor in the IRS’s calculation is housing.

The analysis can include the following costs depending on the situation:

• Rental and/or mortgage payments
• Property taxes
• Homeowners insurance
• Utilities
• Necessary maintenance-related costs

The IRS has local guidelines regarding housing and utilities, and this amount may change based on geographic location and household situations.

This is crucial as two individuals with the same income may have differing payment capacities based on their house payment needs.

2. The Cost of Transportation Is Also Included

When determining ability to pay, the IRS may take transportation costs into account.

These can include costs relating to:

• Vehicle ownership
• Vehicle operating costs
• Fuel
• Insurance
• Registration
• Necessary transportation

The current Form 433-A treats vehicle ownership costs as separate from vehicle operating costs.

Standards for transportation may differ from place to place, and the IRS may rely on local standards for a financial analysis.

But just because you have a fancy car doesn’t guarantee the IRS will allow the entire amount to be a deductible expense.

3. Special Consideration May Be Given to Health Care Expenses

Healthcare costs can have a big impact on a taxpayer’s means.

The IRS will take into account expenses like:

• Health insurance premiums
• Necessary medical care
• Prescription expenses
• Costs for health care services that are paid out of pocket.
• Certain dental expenses

Medical situations may differ greatly, so taxpayers should keep track of their major recurring medical expenses.

When examining financial situations, the IRS refers to a specific category of expenses called “health care. The IRS lists health care as one of the expense categories that is considered when evaluating a financial situation.

4. IRS May Look at Your Assets

Income is just one of the factors.

IRS will also consider your assets, especially if you’ve applied for a payment plan that calls for a detailed financial statement or an Offer in Compromise.

These may include:

• Bank accounts
• Real estate
• Vehicles
• Investments
• Retirement accounts
• Business interests
• Other valuable property

In an Offer in Compromise, the IRS typically bases the calculation of Reasonable Collection Potential on the value of the assets that can be liquidated, plus the estimated income that can be expected to come after the allowable expenses.

Suppose you owe the IRS $150,000.

You make $5000 a month and have $200 remaining after accounting for allowable expenses. On the surface, your monthly pay seems a bit restricted.

But if you also have significant equity in an asset such as a home or investment account, you may have enough for yourself to distribute to the beneficiaries.

That asset equity can have a major impact on IRS judgement of what they can and will reasonably collect.

1. Your family and household situation are important

The IRS typically does not consider finances independent of household factors.

When looking at financial information, the agency might take into account:

• Filing status
• Spouse’s income
• Number of dependents
• Household expenses
• Costs related to children that are required.
• Other financial obligations

This is one reason why two taxpayers with the same tax debt amount can get diverse payment determinations.

2. The IRS May Request Form 433-A, 433-F, or 433-B

The IRS may request that you fill out a Collection Information Statement if a detailed financial analysis of your case is needed.

Common forms include:

• Use Form 433-F Collection Information Statement, to provide the tax department with information to clarify the issues you are facing.
• This is the Collection Information Statement for Wage Earners and Self-Employed Individuals (Form 433-A).
• Completing Form 433-B: Collection Information Statement for Businesses. Businesses completing Form 433-B: Collection Information Statement.
• The IRS has just updated its 2026 versions of these financial disclosure forms in its current list of forms.

These forms may ask you to provide a lot of information about your:

• Income
• Living expenses
• Bank accounts
• Real estate
• Vehicles
• Investments
• Retirement accounts
• Business interests
• Indebtedness and money owed

Accuracy is critical. Giving inaccurate or incomplete information can lead to further issues about your collection case.

3. The impact of the Calculation on an Installment Agreement

A detailed financial analysis isn’t necessary for all taxpayers.

The IRS has a variety of payment methods, and some taxpayers may qualify for simplified installment payment agreements depending on how much is owed and other criteria.

You can pay your tax debt in monthly installments if you can’t pay the debt in full right away.

If the taxpayer needs a more comprehensive financial analysis, the IRS may decide to make a payment based on their financial ability.

The IRS also has a six-year rule, which can exempt some taxpayers from having expenses above the standards when they can pay the tax liability, plus any penalties and interest, in full within six years.

4. If you cannot afford anything, what if?

But some taxpayers simply can’t afford to make their monthly payments without sacrificing the necessities of life.

In this situation, the IRS can put an account into Currently Not Collectible (CNC) status.

There is no such thing as erasing the tax debt by being in a CNC status. Rather, it postpones collection until the IRS thinks such collection is feasible. Interest and penalties will likely be charged and are applicable, and the IRS will periodically check the taxpayer’s financial circumstances.

This can help ease the financial burden on taxpayers in serious financial hardship.

5. How Ability to Pay impacts the Offer in Compromise

An Offer in Compromise can provide for a taxpayer who is eligible to compromise the tax liability for less than what is actually owed.

But it is not just a question of saying to the IRS, “I can’t afford this debt.

In general, the IRS will look at the taxpayer’s Reasonable Collection Potential when assessing a proposed offer. This comprises property, income from future businesses, after deductions of some allowable expenses.

In many cases, the tax will be subject to an offer in lieu of collection where the taxpayer must put forth evidence that the IRS will not fully collect the liability by other means of collection.

The current Form 433-A (OIC) also uses future income calculations when determining the minimum offer amount. The form has different future-income multipliers for each payment period.

For anyone facing an IRS financial review, organization will mean the world of difference.

1. Collect all Financial Documents

Collect:

• Recent pay stubs
• Bank statements
• An affidavit of mortgage or lease statements
• Utility bills
• Insurance statements
• Vehicle loan statements
• Medical expense records
• Investment statements
• Retirement account information
• Financial records of businesses (if any)

2. Get a clear record of your company’s financial status

When self-employed or running a business, keep proper records of business income and business expenses.

3. Don’t exaggerate expenses

The purpose is not to inflate the cost of your expenses.

Rather, keep records of the proper and necessary costs and know what IRS rules might apply.

4. Don’t hide assets

The IRS has the authority to seek information regarding financial accounts, property, and other assets. Not listing assets can hurt your credibility and may ruin a payment deal.

5. Check out the new IRS criteria

Collection Financial Standards change periodically. The IRS notes that the current standard should be reviewed since it may change over time.

6. Take the long-term cost into account

If penalties and interest keep piling up, a seemingly cheap payment can rack up to become hard to afford later.

While taxpayers make installment payments, interest and applicable late-payment penalties generally continue to accrue, the IRS says.

Imagine a taxpayer has:

• Monthly household income: $7,000
• Total monthly expenses (excluding mortgage): $1,800
• Potential monthly surplus: $1,200

A simple breakdown (analysis) may indicate that there is about $1200 per month available to pay the tax debt.

However, the IRS’s actual determination may be different, as it will take into account financial situations, household situations, relevant standards, the nature of the payment arrangement that they are asking for, and assets.

This is just one example of how income minus bills is not necessarily equal to the amount the IRS actually receives.

Don’t simply ignore the notice if the IRS proposes an amount that you feel is too much to pay.

Examine the financial data that was utilized for the calculation and decide if:

• Your income was reported as you reported it.
• The size of the household is correct.
• All necessary costs were accounted for
• The value of assets is correct
• The cost of your medical or other required needs was taken into account
• Your business costs have been accurately worked out

The IRS may review financial information periodically for certain installment agreements. A review may lead to the monthly payment being lowered, raised, or not changed.

When circumstances have changed significantly in your finances, new documentation could be important.

Your tax bill and monthly paycheck are not the only factors the IRS takes into account when deciding what you can afford to pay. It can be affected by income, allowable expenses, assets, household situations, and future earning potential.

If the IRS requires a detailed financial analysis, it is unlikely to be necessary for the streamlined payment plan. In more complex cases, including some types of partial payment plans, hardship situations, and Offers in Compromise, the IRS will need detailed financial disclosures from you in the form of IRS Form 433-A, IRS Form 433-F, or IRS Form 433-B.

The most important step is to be proactive. Keep accurate financial records, know the IRS guidelines, respond to IRS notices on time, and don’t agree to a payment that you can’t afford.

If the IRS is considering the ability to collect a large amount of tax debt, then you can consult with a qualified tax professional or IRS collection agent to make sure you fully understand and to find out which resolution option will be best for you with your finances in mind.

1. How does the IRS determine how much I can afford?

The IRS typically considers income, living expenses, assets, family needs, or liabilities. They may also use the forms 433-A, 433-F, or 433-B to assess the tax arrears based on the applicant’s financial capability.

2. What will happen if I can’t afford my tax debt?

A taxpayer who is unable to make payments without experiencing economic hardship may apply for Currently Not Collectible or any other tax debt moratorium. The interest and penalties on the delinquencies usually continue to accrue.

3. Can the IRS accept less than the full amount?

Yes, they can. Taxpayers may apply for an Offer in Compromise to settle their tax debt obligations for less than they currently owe. The IRS typically reviews a taxpayer’s assets, income, expenses, and projected ability to pay before approving the application.