Overview

When the IRS evaluates a taxpayer’s ability to pay, it doesn’t simply look at gross income. The agency follows the Collection Financial Standards (CFS) — a set of national and local expense standards — to determine which living costs are “reasonable” and therefore allowable when calculating how much a taxpayer can pay toward tax debt. These standards guide installment agreements, Currently Not Collectible (CNC) status, Offers in Compromise (OIC), and levy decisions (IRS Collection Financial Standards, IRS.gov).

In my practice advising clients on IRS collections, I’ve seen correctly documented reasonable living expenses make the difference between an unaffordable levy and a workable payment arrangement. The IRS’s goal is to protect a minimal standard of living while still collecting taxes it can reasonably expect to recover.

What the IRS uses: national standards, local standards, and actual expenses

  • National standards: These cover common household items such as food, clothing, household supplies and personal care items, and some health care costs. The IRS publishes national allowances by household size and updates them periodically as part of the Collection Financial Standards (see IRS Collection Financial Standards).

  • Local standards (housing and utilities, and transportation): These are geography-based tables that set allowable amounts for rent or mortgage, utilities, and basic transportation costs. The IRS compares reported housing and transportation expenses to the appropriate local standard for the taxpayer’s county of residence and household size.

  • Actual expenses: The IRS may allow specific actual expenses when the standard does not reasonably reflect the taxpayer’s needs. Examples include documented, necessary medical costs, child care, or higher housing costs that can be shown as typical for the taxpayer’s situation and verifiable with bills, leases, or receipts.

The IRS applies these standards through collection tools and formulas; allowable living expenses are subtracted from monthly income to produce Reasonably Collectible Income (RCI). That RCI becomes the starting point for installment agreements, CNC determinations, and OIC analysis.

Sources: IRS Collection Financial Standards (https://www.irs.gov/individuals/collections/collection-financial-standards); “Understanding Your Collection Options” (https://www.irs.gov/individuals/understanding-your-collection-options).

How the standards affect common collection outcomes

  • Installment agreements: The IRS uses RCI to set a sustainable monthly payment. If your documented expenses leave little or no RCI, agents may accept a lower monthly amount or put you into a longer-term plan.

  • Currently Not Collectible (CNC): If allowable expenses exceed income and leave no RCI to collect, the IRS may place the account in CNC status, temporarily halting enforced collection activity (IRS — Currently Not Collectible guidance).

  • Offer in Compromise (OIC): The IRS evaluates OIC offers using projected RCI and reasonably collectible equity. Accurate expense reporting is critical; overstated expenses can doom an offer, and understated legitimate expenses can result in unaffordable payments. See our guide on “Calculating Reasonably Collectible Income for Offer in Compromise Consideration” for more detail: https://finhelp.io/glossary/calculating-reasonably-collectible-income-for-offer-in-compromise-consideration/.

  • Levy and lien decisions: Before levying, the IRS considers whether collection against wages, bank accounts, or property would leave the taxpayer with more than the allowable living expenses; improper levies can be protested.

Common allowance rules and practical edges

  1. Housing & utilities: If your rent or mortgage exceeds the local standard, provide a lease/mortgage statement and 12 months of utility bills. The IRS will often allow higher amounts if they are typical, necessary, and documented.
  2. Food and household items: These are governed by the national standards, which vary by family size. You don’t usually provide receipts for these — the IRS assumes the standard unless there’s evidence your situation requires actual expenses.
  3. Medical expenses: Reasonable, out-of-pocket medical costs above the national standard can be claimed as actual expenses. Provide itemized bills, insurance explanations of benefits, and proof of payment when possible.
  4. Transportation: The IRS local transport standard covers vehicle ownership and operating costs. If your necessary transportation costs exceed the standard (for medical treatment or business commuting that isn’t reimbursed), include mileage logs, repair bills, and registration/insurance records where relevant.

Forms and documentation the IRS will request

  • Form 433-F (Collection Information Statement) is the streamlined statement used to evaluate a taxpayer’s financial position during collections. For wage-earners or self-employed taxpayers, the IRS may ask for Form 433-A (Collection Information Statement for Wage Earners and Self-Employed) or Form 433-B for businesses.
  • Pay stubs, bank statements (typically 3–6 months), copies of leases or mortgage statements, utility bills, vehicle registration and insurance, medical bills, court-ordered support, and receipts for essential expenses.

In my experience, a well-organized packet with clear labeling, a one-page summary, and scanned supporting documents speeds resolution and reduces follow-up requests from the IRS.

Step-by-step: Preparing to document reasonable living expenses

  1. Gather income: last 2–3 paystubs, Social Security or pension statements, unemployment, and business profit/loss statements.
  2. Collect housing docs: lease/mortgage statements, property tax info, homeowners’ insurance, and a 12-month utility history.
  3. Sort medical and special expenses: itemized bills, explanations of benefits, and proof of payments for necessary care.
  4. Assemble transportation evidence: loan/lease statements, insurance and registration, repair invoices, and a mileage log if you claim business or necessary medical travel.
  5. Reconcile bank statements: identify recurring payments for childcare, elder care, student loans, or legally binding obligations.
  6. Complete the appropriate IRS form (433-F, 433-A, or 433-B) and attach a concise cover letter explaining special circumstances.

Negotiation tips and practical strategies

  • Be honest and consistent: The IRS cross-checks reported income and expenses. Discrepancies can delay or derail a favorable determination.
  • Prioritize documentation for exceptions: If you’re requesting an actual expense above the standard (for housing, medical, or transportation), submit the strongest possible proof.
  • Use the right form: An OIC often requires a 433-F plus Form 656 and a complete financial package. For installment agreements, a 433-F is typically sufficient unless the IRS requests more detail.
  • Know alternatives: If you truly cannot pay, request CNC status or explore Community Resources for taxpayer assistance; if an OIC is likely, review our guides on preparing a strong offer and calculating RCI (see links below).

Helpful internal resources:

Common mistakes taxpayers make

  • Treating national/local standards as optional: Many taxpayers try to invent higher expenses without documentation and fail. The IRS will apply the standards unless a clear, documented reason exists to allow actual expenses.
  • Missing documentation: Small errors—like a missing signature, inconsistent dates, or incomplete bills—create extra work and can lead to denials.
  • Overlooking periodic or seasonal costs: Property taxes, annual insurance premiums, and vehicle registration fees can be reported as monthly equivalents; failing to do this understates allowable expenses.

Appeals, representation, and taxpayer rights

If you disagree with how the IRS calculated your allowable living expenses, you have appeal options:

  • Contact the IRS collection specialist or their manager to request clarification or submit additional documentation.
  • If collection action continues, seek a Collection Due Process (CDP) hearing or contact the Office of Appeals through the Collection Appeals Program (CAP) (IRS — Collection Due Process and Appeals guidance).
  • You may also authorize a representative (CPA, enrolled agent, or attorney) using Form 2848 to handle negotiations. In my practice, clients who are organized and represented usually obtain faster, more favorable outcomes.

Remember the Taxpayer Bill of Rights: you have a right to be informed, to quality service, and to challenge the IRS’s position.

Real-world examples (anonymized)

  • Case 1: A single parent with high documented childcare and medical costs — by submitting 12 months of bank statements, childcare receipts, and medical bills, we secured CNC status until child support arrangements stabilized.
  • Case 2: A small-business owner whose household income dipped after a downturn — we used a Form 433-B package showing reduced business payroll and allowable personal housing expenses to obtain a low monthly installment agreement that kept the owner in business while paying down tax debt.

Frequently asked questions

  • Can I use credit-card bills to prove living expenses? Credit-card statements can support claimed expenses, but the IRS prefers itemized bills and proof of essential service payments. Repeated, verifiable transactions are best.
  • How often does the IRS update standards? The IRS updates collection financial standards periodically; check the Collection Financial Standards page on IRS.gov for the current tables.
  • Are luxury items ever allowed? No. Items deemed nonessential or luxury (vacations, second homes, non-essential subscriptions) are not considered reasonable living expenses.

Final checklist before submitting your packet

  • Completed Form 433-F (or 433-A/433-B as requested).
  • 3–6 months of bank statements and paystubs.
  • Lease/mortgage and 12 months of utility bills.
  • Itemized medical bills and proof of payment for medical exceptions.
  • Vehicle registration, insurance, loan/lease statements, and mileage logs if applicable.
  • A brief cover letter outlining special circumstances and contact information for your representative (if any).

Disclaimer

This article is educational and does not replace personalized tax advice. For case-specific guidance, consult a tax professional (CPA, enrolled agent, or tax attorney) or contact the IRS collections office. The information here references IRS guidance current as of 2025.

Authoritative sources

Interlinked FinHelp guidance:

If you need a checklist template or a review of a financial statement before submitting to the IRS, consider consulting a qualified tax practitioner or using FinHelp professional services.