Taxpayer's Guide to IRS Collection Financial Standards
Collection Financial Standards are a set of standards the IRS uses when assessing a taxpayer's eligibility for certain payment plans and tax relief programs. The IRS also utilizes collection financial standards to determine a taxpayer's ability to pay back taxes owed. The standards detail the maximum amount the IRS believes taxpayers monthly should be spending on essential living expenses. If taxpayers are overspending, the IRS will consider them to have more disposable income than they truly have. However, in certain circumstances, the IRS may allow you to supersede a standard, but you have to support your position. In certain situations, the IRS may allow all current expenses if taxpayers can pay off their tax liabilities within five years.
The IRS obtains taxpayers' financial information by requiring them to complete forms 433-F (ACS), 433-A (Revenue Officer), and/or 433-B (Business).
What are IRS Collection Financial Standards?
IRS Collection Financial Standards refer to the standard amounts taxpayers need to cover their (and/or their family's) necessary living expenses. The IRS uses national standards for food, clothing, and other items and regional standards for housing, utilities, and transportation. The standards are dependent on family size (the total dependents on your tax return). Taxpayers are allowed these amounts even if the taxpayer is spending less.
How Does the IRS Use Collection Financial Standards?
The IRS takes Collection Financial Standards into account in a variety of situations, with some examples being:
- If you apply to reduce your tax liability through an offer in compromise or a partial payment installment agreement.
- If you can't pay the minimum payment on a monthly installment plan
- If you want to set up a payment plan on over $50,0000 of tax debt.
- Generally, to qualify for non-collectible status
To qualify for these types of programs, generally, you have to substantiate your income, expenses, liabilities, and assets. Then, the agency compares your expenses to these standards to ensure you are paying as much as possible on your tax liability.
How Much Are the Collection Financial Standards?
The Collection Financial Standards are not generous, although they recently rose greatly due to inflation. If you want to use certain types of tax relief, the IRS thinks you should live very meagerly until you pay off your tax liability. As a result, the standards are relatively low. They just allow for necessary expenses. However, the IRS may allow other expenses if you can show they are necessary for you and/or your family's production of income or health and welfare.
Housing and Utilities
Housing and utility standards vary based on your state and county. For example, the monthly housing expense for a single person living in San Francisco County, CA is $3,553. A family of five in this county has a monthly housing allowance of $4,982. In McDowell County, WV a single person has a housing allowance of $987, while a family of five has a monthly housing allowance of $1383. The IRS keeps an updated list of county-based housing and utility standards.
This category includes mortgage or rent, property taxes, insurance, maintenance, and repairs. It also includes utilities such as gas, electric, water, heating, oil, and garbage collection. Communication such as cell phones and internet service also fall into this category.
Food, Clothing, and Misc
As of April 2022, the national standards for food, housekeeping supplies, clothing, personal care, and miscellaneous expenses are $785 for a single person, $1,410 for two people, $1,610 for three people, and $1,900 for four people. Larger families should add $344 per person.
The IRS also uses a national standard for out-of-pocket healthcare expenses. It is $75 if you are under 65 and $153 if you're 65 or older. These numbers might cover your budget if you're just buying headache medicine and cough syrup once in a while.
If you have a chronic illness, these numbers are extremely low. This is one category where there is a lot of flexibility. If you have necessary medical expenses, the IRS will usually allow them.
Financial Collection Standards of transportation costs include a national allowance for loan or lease payments and a regional allowance for monthly operating costs. The National Collection Standards allow $588 per month for one car or $1,176 for two cars.
Operating standards range from $231 per month in the Anchorage area to $812 for two vehicles in the New York region. If you use public transportation, the national standard is $242. The IRS also updates its transportation standards on an annual basis.
Who Creates the Financial Collection Standards?
The IRS creates Financial Collection Standards using information from the Bureau of Labor Statistics Consumer Expenditure Survey, the Medical Expenditure Panel Survey, and other research groups. The standards are based on the average cost of living expenses around the country.
Does the IRS Allow Other Expenses?
You may have noticed that the list of expenses included in the National Financial Standards is relatively short. What about other expenses? Does the IRS let you have other living expenses if you want to qualify for an offer in compromise or a similar program? Sometimes they do. You must prove your case. If you can prove other expenses not covered by the IRS's financial collection standards are necessary, the IRS may allow them. You must show they are necessary for your health and welfare or for the production of income. To a limited degree, the IRS may allow the following expenses if necessary (not exhaustive):
- Childcare costs for parents to work or look for work.
- Accounting and legal fees.
- Involuntary work deductions such as union dues.
- Necessary expenses to earn a living such as tools for work.
- Life insurance premiums (limited)
- Current taxes and sometimes payments for delinquent state taxes
Do Financial Collection Standards Always Apply?
Not all tax relief programs involve the Financial Collection Standards. Often, you can set up a payment plan or make other arrangements without the IRS requesting you fill out a 433 or Collection Information Statement.
If you qualify for an IRS streamlined installment agreement, the IRS will not assess your financial situation. Instead, the agency will just allow you to make monthly payments on your tax liability until you pay it off. To qualify, you must owe less than $50,000 and be able to pay off the tax liability in six years. Note that if you owe between $25,000 and $50,000, you have to set up a direct debit as the payment method. Recently, the IRS is allowing installment agreements for balances up to $250,000 and in certain cases not requiring financial disclosure.
What Is the Six-Year Rule for Financial Collection Standards?
Even if you don't qualify for a streamlined agreement, you can still avoid being held to these standards if you can pay off your taxes (including penalties and interest) within six years. In these situations, the IRS may request a look at your financial situation, but you will be allowed expenses that exceed the standards and "extras" such as student loans or credit card repayments.
Get Help Dealing With the IRS
If you're trying to set up a tax resolution plan that requires financial disclosure, you may want to contact a tax professional for help. A tax professional can answer your questions and help you present your information to the IRS in the most effective way possible. If your expenses exceed the standards, they can negotiate with the IRS and explain the situation.
Don't let an IRS tax liability lead to enforced collection actions. Get help and make arrangements with the IRS now. Search for a tax professional in your area by using the "Find a Tax Pro" button at the top of our website.