How does the IRS decide what you can afford to pay?

The IRS decides what you can afford by comparing your monthly income with a set of allowable expenses, most of them capped by its Collection Financial Standards, and by adding the equity it could reach in your assets. Whatever income is left after allowable expenses is treated as available to pay the tax, and that number drives the size of a payment plan, the minimum acceptable offer in compromise, and whether collection is paused for hardship.

The standards are national and local tables, not a judgment about how you choose to live, and knowing how they work before you fill out a financial statement is often the difference between a workable arrangement and one that fails within months. They are one of the tools described on Kathryn Meyer's page on IRS collections and enforcement.

How the IRS works out your ability to pay, step by step

The analysis is the same whether a revenue officer, a campus employee or an offer examiner does it. The Internal Revenue Manual's Financial Analysis Handbook (IRM 5.15.1) sets out the method, and the IRS's Collection Financial Standards page publishes the numbers.

1. You give the IRS a financial statement. Individuals use Form 433-A or the shorter Form 433-F; businesses use Form 433-B; offers use the versions printed in the Form 656-B booklet. Form 433-A (Rev. 6-2026) tells wage earners to complete Sections 1 to 5 and self-employed individuals Sections 1 and 3 to 7.
2. The IRS totals your gross monthly income from wages, self-employment, rentals, pensions, Social Security and other sources, and looks at whether it is likely to rise or fall.
3. It subtracts allowable expenses. These are expenses that meet the "necessary expense test": they provide for your family's health and welfare or the production of income.
4. The difference is your monthly disposable income, the amount the IRS expects you can pay each month.
5. It values your assets at quick sale value, less what you owe against them, to see what equity could pay the tax.
6. It matches the result to an outcome: full payment, an installment agreement at the disposable income figure, an offer based on reasonable collection potential, or a hardship pause.

Many people never go through this analysis at all. The IRS says the vast majority of installment agreements its employees set up are simple payment plans, which require no financial analysis and no substantiation of expenses. The full review usually comes into play for larger balances, offers, hardship requests and cases assigned to a revenue officer.

What are the three kinds of allowable expenses?

IRM 5.15.1.8 sorts expenses into three groups, and each is treated differently.

• Allowable living expenses, set by the national and local standards described below.
• Other necessary expenses, which meet the necessary expense test and are normally allowed in a reasonable amount. The IRM's list includes current-year federal, state and local taxes (allowed whether or not you paid them in the past), court-ordered alimony and child support that is actually being paid, term life insurance on your own life, child care, involuntary payroll deductions such as union dues, federally guaranteed student loans for your own post-high-school education, and fees for representation before the IRS.
• Other conditional expenses, which may not meet the test but can be allowed in the circumstances of a particular case.

The IRM gives an example that matters to professionals: continuing education is allowed when it is a condition of employment, and the manual's own illustration is an attorney who must earn education credits each year to keep a license. Credit card payments, by contrast, are treated as a way of paying for other expenses rather than an expense of their own.

What are the 2026 national and local standards?

The current standards took effect on June 29, 2026, and the IRS now adjusts them for inflation with the Personal Consumption Expenditures index. The national standard for food, clothing and other items covers five categories (food, housekeeping supplies, apparel and services, personal care, and miscellaneous) and is allowed in full for your family size without questioning what you actually spend.

The housing and utilities standard is published county by county and covers rent or mortgage, property taxes, insurance, repairs, utilities, phones and internet. The number of people allowed is generally the number of dependents on your most recent return. If the standards are not enough for your basic living expenses, the IRS may allow actual amounts, but only with documentation showing why.

How are your assets counted?

The IRS looks at what you own as a second source of payment. Under IRM 5.15.1, assets are valued at quick sale value, which "is calculated at 80% of FMV" in general, reflecting a sale within about 90 days; the percentage can move up or down with the type of asset and the market. Loans secured by the asset are then subtracted. The Form 656-B offer worksheets use the same 0.8 multiplier for real estate, vehicles, retirement accounts and other valuables.

For individuals, the offer worksheets also subtract $1,000 from total bank balances and $3,450 from the value of a vehicle, but the booklet explains that these allowances apply only after the IRS decides you cannot pay in full from equity and an installment agreement. Retirement accounts are treated as assets that may be reached, and whole life insurance with cash value is reviewed as something you could borrow against or surrender.

How does the result drive each collection option?

The offer formula is where the numbers matter most. In the Form 656-B worksheets, if you will pay the offer in five or fewer payments within five months, your monthly remaining income is multiplied by 12; if you will pay over 6 to 24 months, it is multiplied by 24. How the IRS weighs the rest of an offer is covered in whether you qualify for an IRS offer in compromise.

When the analysis shows no money left after allowable expenses, the result is often a hardship pause, explained in what currently not collectible status means. When there is some monthly surplus, the comparison of plans in the IRS payment plan options shows which agreement fits.

What changes the answer

• Whether you can pay within six years. If the balance, including accruals, can be paid within six years and before the collection deadline, IRM 5.15.1.11 says all reasonable expenses may be allowed, including minimum credit card payments; if not, the IRS may give up to one year to cut or end an expense.
• Where you live. Housing and vehicle operating standards vary by county and metropolitan area; taxpayers living abroad are measured against separate international standards (IRM 5.15.1.8).
• Who you live with. When you share a household with someone who does not owe the tax, IRM 5.15.1 prorates shared expenses by your share of household income; its example allows 80 percent of shared expenses to a taxpayer who earns $20,000 of a $25,000 household income.
• Whether you are an individual or a business. The living expense standards do not apply to corporations, partnerships, LLCs or business expenses, which are analyzed on their own records (IRM 5.15.1.8).
• Documentation. Expenses above a standard need substantiation; the IRS normally reviews the last three months of expenses and may look at up to a year if three months are not representative (IRM 5.15.1).
• The collection deadline. How much time remains on the 10-year clock limits how long a plan can run; see how long the IRS has to collect a tax debt.

For example: a two-person household near Washington

For example, imagine a married couple with no children living in the Washington, D.C. area who owe $60,000 and file a joint Form 433-A. Their gross monthly income is $9,500. They claim $1,900 for food and household items, but the two-person national standard of $1,558 applies without proof, and the $342 difference is disallowed unless they can show it is necessary. Each is under 65, so $180 for out-of-pocket health care is allowed on top of their $600 in health insurance premiums. Their rent and utilities of $2,600 are below their county's housing standard, so the actual amount is allowed. They have one car with a $450 loan payment, which is under the $703 ownership standard, and the D.C. operating standard of $301 applies. Their current federal and state withholding of $2,200 is allowed in full. Allowed expenses total $7,889, leaving about $1,611 a month that the IRS would treat as available. Because $1,611 a month would pay the balance well within six years, the six-year rule could let them keep some expenses above the standards, such as minimum credit card payments, if they ask for it. This is a hypothetical, not a real case.

Common mistakes on IRS financial statements

• Listing what you spend instead of what is allowed. Food, clothing and similar items are capped at the national standard unless you document why more is necessary.
• Leaving out income. Every source belongs on the form, and the IRM tells employees to verify sources of income such as employers, bank accounts and retirement accounts.
• Forgetting allowable items. Current-year estimated tax payments, court-ordered support actually paid, and fees for representation before the IRS are commonly overlooked.
• Ignoring the six-year rule. If the balance can be paid within six years, asking for it can preserve expenses the standards would otherwise cut.
• Valuing assets at full price. Quick sale value is generally 80 percent of fair market value, less loans; using full value overstates what the IRS can reach.
• Sending stale statements. Out-of-date bank and pay records invite follow-up requests and delay.

What to do this week

1. Gather three months of pay stubs, bank statements and bills, plus statements for every loan, retirement account and life insurance policy.
2. Look up the current national standards, the housing standard for your county and the operating standard for your area on the IRS Collection Financial Standards pages.
3. List every expense that may qualify as "other necessary," with proof that each payment is actually being made.
4. Work out quick sale value for each asset at 80 percent of fair market value, less what you owe on it.
5. Decide which outcome the numbers point to before you file anything, using the checklist of what to gather when the IRS starts collection.

Frequently asked questions

Does the IRS let you keep paying credit cards?

Credit cards are treated as a way of paying for other expenses, and the miscellaneous part of the national standard can be used for card payments. IRM 5.15.1 adds that minimum payments on credit cards are generally allowed under the six-year rule.

Can you deduct your tax attorney's fees as an expense?

The IRM lists accounting and legal fees as an allowable expense when they are for representation before the IRS, such as resolving balances due, delinquent returns or examinations, and are reasonable for the complexity of the case. Fees tied to business operations reported on Schedule C should not be claimed as personal expenses.

What if your rent is higher than the housing standard?

You are normally allowed the lesser of your actual cost or the county standard. A higher amount can be allowed if you document why the standard is inadequate for your basic needs, and the six-year rule may also help.

Do private collection agencies use these standards?

No. The IRS says its contracted agencies do not collect financial information or decide offers; see whether a private agency collecting your IRS debt is legitimate.

Can you challenge the IRS's figures?

Yes. A rejected installment agreement can be appealed through the Collection Appeals Program, and collection alternatives can be raised at a Collection Due Process hearing; the two routes are compared in Collection Due Process or the Collection Appeals Program.

Does a levy change the analysis?

A levy that leaves you unable to meet basic living expenses is one of the grounds for release, measured against these same allowances; see how to get a bank or wage levy released.

Do the standards apply to a law firm's own payroll tax debt?

No. Business balances are analyzed on the business's own income and expenses, not the living standards. Keeping deposits current in the first place is part of tax planning for law firms. The firm's Annual Tax Health Checkup includes a payroll tax compliance check.

Getting the numbers right before you file

A collection information statement is a sworn financial picture, and the figures in it can decide whether you get a plan you can keep, an offer the IRS will consider, or a pause. Kathryn Meyer spent more than two decades in the IRS Office of Chief Counsel and represents taxpayers in collection matters. Collection work is one of the firm's services. If the IRS has asked for your financial information, contact the firm or call (571) 560-8674 before you send it.

Sources

• IRS, Collection financial standards (effective June 29, 2026)
• IRS, National standards: Food, clothing and other items
• IRS, National standards: Out-of-pocket health care
• IRS, Local standards: Transportation
• Internal Revenue Manual 5.15.1, Financial Analysis Handbook
• Internal Revenue Manual 5.16.1, Currently Not Collectible
• IRS Form 656-B, Offer in Compromise booklet
• IRS Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals (Rev. 6-2026)
• IRS Form 433-F, Collection Information Statement