How to Prepare a Financial Statement for IRS Collection Negotiations

Why this document matters

A well-prepared financial statement is the single most important tool when negotiating with the IRS over unpaid taxes. It turns verbal explanations into verifiable facts, demonstrates good faith, and allows the IRS to calculate collection options (installment agreement, Offer in Compromise, or Currently Not Collectible). In my 15 years as a CPA and financial planner, I’ve seen accurately prepared financial statements shorten resolution time, reduce unnecessary liens or levies, and improve negotiation outcomes.

What the IRS expects (and which forms to use)

The IRS uses standardized forms and its own collection standards to evaluate ability to pay. The most common forms are:

• Form 433-F, Collection Information Statement — the most commonly requested form used by revenue officers to evaluate collection alternatives (individuals and businesses) (IRS.gov).
• Form 433-A (OIC) and Form 433-B (OIC) — versions of the collection statement tailored for Offer in Compromise packages (IRS Offer in Compromise instructions) (IRS.gov).
• Form 656 — the Offer in Compromise application form when proposing a settlement (IRS.gov).

Which to submit depends on the outcome you pursue. Installment agreements typically begin with Form 433-F or the IRS Online Payment Agreement (for simpler cases). An Offer in Compromise requires Form 656 plus the appropriate 433-series statement and supporting documents. Always check the IRS collection notices and the IRS website for the precise documents the examiner requests (irs.gov).

Sources: IRS Offer in Compromise and Collection Information forms pages (irs.gov).

Step-by-step checklist: building the financial statement

The goal is to create a truthful, verifiable snapshot that answers: how much can you pay now, monthly, and from selling nonexempt assets? Follow these steps.

1. Gather identity and tax basics

• Last filed federal tax return(s).
• Social Security numbers and contact info for all schedules/filers.
• IRS notice or account transcript showing balance due.

1. Collect proof of income

• Most recent 3–6 months of pay stubs or business deposit records.
• Last 2 years of Schedule C, K-1s, W-2s, or 1099s for self-employed income.
• Bank statements (3–6 months) to substantiate deposits.

1. List and document monthly expenses

• Housing (rent or mortgage statements, property tax/insurance).
• Utilities (electric, gas, water).
• Food, clothing, and transportation (vehicle loan, insurance, gas).
• Childcare, medical out-of-pocket costs, minimum debt payments.
• For allowable standards, include notes on unusual or non-standard expenses.

Tip: The IRS applies National and Local Standards for certain expense categories (food, clothing, housing, transportation). Use them to explain why documented expenses exceed or match standards (irs.gov/collections/standards).

4. Inventory assets and liabilities

• Bank balances, retirement accounts, brokerage accounts, cash on hand.
• Real estate (estimated market value and mortgage balance), vehicles (value and loan balance).
• Business assets and accounts receivable.
• Outstanding debts: mortgages, auto loans, credit cards, student loans, tax liens.

4. Attach supporting documents

• Bank statements, brokerage statements, retirement statements.
• Appraisals or a credible market estimate for real estate and vehicles.
• Bills, medical receipts, and court-ordered payments.

4. Complete the IRS form requested

• Enter your monthly totals and attach documents. Double-check math and avoid rounding that masks accuracy.

How the IRS evaluates the statement

The IRS looks at two things: monthly disposable income and realizable equity in assets.

• Monthly disposable income: Income minus allowable living expenses (using IRS standards where applicable). This drives installment agreement terms.
• Realizable equity: Market value of assets minus secured debt and reasonable sale costs. The IRS considers whether the asset can be sold and proceeds used to satisfy the liability.

For Offers in Compromise, the IRS calculates Reasonable Collection Potential (RCP). In simple terms, RCP = (monthly disposable income × collection period) + realizable equity (IRS Offer in Compromise calculation). If your offer equals or exceeds RCP, acceptance is more likely. See our detailed walkthrough on how offers are calculated for a practical example: Preparing a Financial Package for an Offer in Compromise: Worksheets and Documents and How Offer in Compromise Amounts Are Calculated: A Simple Walkthrough.

(Internal links: “Preparing a Financial Package for an Offer in Compromise: Worksheets and Documents” — https://finhelp.io/glossary/preparing-a-financial-package-for-an-offer-in-compromise-worksheets-and-documents/; “How Offer in Compromise Amounts Are Calculated” — https://finhelp.io/glossary/how-offer-in-compromise-amounts-are-calculated-a-simple-walkthrough/)

Sample calculation (simple example)

Assume: Monthly gross income $4,500; allowable monthly expenses per IRS standards and documented obligations = $3,900; realizable equity in nonexempt assets = $8,000; statutory collection period the IRS uses = 12 months.

• Monthly disposable income = $4,500 – $3,900 = $600.
• RCP = ($600 × 12) + $8,000 = $7,200 + $8,000 = $15,200.

If you submit an Offer in Compromise, an offer at or above $15,200 would be considered more competitive (other factors apply). This calculation underscores the value of detail: reduceable expenses and legitimate claims lower RCP.

Common mistakes and how to avoid them

• Omitting sources of income: Include side jobs, investment income, and non-taxable benefits where relevant.
• Using stale or inconsistent documentation: Use current, consistent statements (same 3–6 month window) to support monthly averages.
• Hiding assets or understating values: This damages credibility and can lead to penalties. Be transparent.
• Relying solely on verbal explanations: Always attach documents; revenue officers expect evidence.

Practical negotiation tips

• Be truthful and conservative. Overstating hardship can lead to scrutiny; understating affordability may miss opportunities.
• Explain temporary vs permanent hardships (medical bills, temporary job loss). Temporary hardships are often better shown with timelines and supporting documents.
• Update the statement if circumstances change during negotiation. The IRS will reassess if new information is provided.
• Consider professional representation. An enrolled agent, CPA, or tax attorney can prepare and explain complex business financials and may speed negotiations.

In my practice I’ve helped clients get more realistic payment plans by separating one-time expenses (e.g., emergency dental surgery) from recurring living costs and by documenting business seasonality clearly.

Privacy and security when sending documents

Only submit documents requested by the IRS. Remove unnecessary personal data where possible (do not redact the last four digits of an SSN when the IRS needs full ID, but avoid emailing full SSNs unless using secure portals). Use secure file delivery methods and keep copies.

When a financial statement won’t help

If tax fraud, unfiled returns, or intentionally hidden income exist, a financial statement won’t remove criminal exposure. Also, for very small balances with straightforward ability to pay, the IRS may require a simple online payment agreement rather than full financial disclosure.

Next steps after you prepare the statement

1. Confirm which form the IRS or revenue officer requested (433-F, 433-A/OIC, or 433-B).
2. Attach supporting documents in the order requested and include a cover letter summarizing key points.
3. Propose a realistic outcome: monthly payment amount or an offer figure based on the RCP calculation.
4. Keep copies and a clear timeline of submission and any communications.

Resources and authoritative references

• IRS Collection Information Statement (Form 433-F) and related instructions: https://www.irs.gov
• IRS Offer in Compromise (Forms 656 + 433 series) and calculation overview: https://www.irs.gov
• Consumer Financial Protection Bureau (debt negotiation principles): https://www.consumerfinance.gov

Short FAQ

Q: How long does the IRS take to review a financial statement?
A: It varies. An Offer in Compromise review can take several months; simpler collection reviews or installment agreements can be faster. Expect follow-up requests for supporting documentation.

Q: Can I submit a financial statement online?
A: The IRS offers online tools for some installment agreements; Offers in Compromise typically require paper submission for Forms 656 and the relevant 433-series, though the IRS updates procedures—check irs.gov.

Q: Should I hire representation?
A: If your finances are complex, you have a business, or larger balances are involved, professional representation reduces errors and improves outcomes.

Disclaimer

This article is educational and general in nature. It is not legal or tax advice for your specific situation. Consult a qualified tax professional (CPA, enrolled agent, or tax attorney) before acting on IRS collection matters.

Further reading on FinHelp

• Preparing a Financial Package for an Offer in Compromise: Worksheets and Documents — https://finhelp.io/glossary/preparing-a-financial-package-for-an-offer-in-compromise-worksheets-and-documents/
• How Offer in Compromise Amounts Are Calculated: A Simple Walkthrough — https://finhelp.io/glossary/how-offer-in-compromise-amounts-are-calculated-a-simple-walkthrough/

(Author: Experienced CPA and financial planner; last reviewed 2025.)