Overview

Preparing a clear, accurate financial statement is one of the single most impactful things you can do when resolving tax debt. The statement is the financial story you give the IRS (or a state revenue agency) to explain cash flow, demonstrate hardship, or justify a reduced payment. Because collection officers base many decisions—installment agreements, Offers in Compromise (OIC), or Currently Not Collectible (CNC) status—on the financial information you provide, mistakes or omissions can slow the process, increase penalties, or produce an unfavorable outcome (IRS collection guidance).

Why it matters — how the IRS uses your statement

The IRS uses financial statements to determine whether you can pay your tax liability now, over time, or not at all. Common collection paths that rely on financial statements include:

  • Installment agreements: The IRS calculates monthly payment ability from documented income and allowable living expenses.
  • Offer in Compromise (OIC): The IRS evaluates reasonable collection potential based on assets and future income projections (see IRS OIC guidance).
  • Currently Not Collectible (CNC): If verified monthly income does not cover basic expenses, the IRS may temporarily cease collection activity.

Refer to IRS collection forms and standards—particularly Form 433-F and the Collection Financial Standards—when preparing figures (IRS, About Form 433-F).

Step-by-step checklist to prepare a usable financial statement

Follow these steps to create a complete, credible statement the IRS will accept and trust.

  1. Gather core documents
  • Most recent federal income tax returns (last 2–3 years) and W-2s/1099s.
  • Bank statements (3–12 months depending on the case).
  • Pay stubs and business profit-and-loss statements.
  • Loan statements, credit-card balances, mortgage statements.
  • Title documents for vehicles, deeds, brokerage and retirement account statements.
  • Bills for recurring expenses (rent, utilities, insurance, childcare).
  • Documentation for irregular or seasonal income and expenses.
  1. Choose the right form or format
  • Many taxpayers complete the IRS’s Collection Information Statement (Form 433-F for individuals) or equivalent state forms. For businesses, Form 433-B may apply. Use the format requested by the collection office—if none is specified, a clear, tabular statement with supporting attachments is best.
  1. Reconcile numbers
  • Cross-check income, bank balances, and liabilities against tax returns and statements. Reconcile differences and add a short explanation for any variances.
  1. Itemize and document
  • Break income into types (wages, self-employment, rental, investment).
  • List fixed vs. variable expenses and provide receipts or statements for big items.
  1. Summarize and annotate
  • Include a one-page narrative summary explaining critical items (e.g., reduced hours, recent business loss, pending medical bills). Attach supporting documentation.
  1. Update regularly
  • Financial situations change; submit updated statements when circumstances materially change (job loss, medical event, asset sale).

Documentation to include (exact copies, not summaries)

  • Federal tax returns (signed): last 2–3 years.
  • Recent pay stubs and profit-and-loss (P&L) statements.
  • Bank statements for accounts with significant activity.
  • Statements for loans, credit cards, and lines of credit.
  • Proof of assets: vehicle titles, deeds, brokerage statements, retirement account statements.
  • Proof of recurring expenses: lease agreements, insurance invoices, childcare contracts.
  • Medical bills, court-ordered payments, or other special expenses.

Always keep originals or certified copies and provide clear, legible attachments to support every material claim.

Do’s — practical guidance that improves outcomes

  • Be comprehensive and transparent. Include all income streams (even small or irregular ones). Omissions create suspicion and may lead to penalties.
  • Use primary-source documents. Base figures on tax returns, bank records, and account statements—not memory or rough estimates.
  • Follow IRS allowable expense standards when possible. The IRS publishes Collection Financial Standards that collection officers use to evaluate living expenses (IRS Collection Financial Standards).
  • Explain anomalies. If an account shows a large one-time deposit or an unusual expense, add a short note and supporting documentation.
  • Keep copies and an index. Organize your submission so the reviewer can quickly verify each line item.
  • Update your statement when facts change. If you lose a job or incur new medical bills, send an updated packet and highlight the changes.
  • Consider professional help when the case is complex. Experienced tax resolution pros can package statements to match IRS expectations and reduce back-and-forth.

Don’ts — avoid these common errors and risks

  • Don’t omit liabilities. Forgetting loans, tax liens, or joint debts undermines credibility.
  • Don’t inflate expenses or underreport income. Misrepresentation can lead to civil penalties or criminal exposure.
  • Don’t mix personal and business finances without clear explanation. If you’re self‑employed, provide P&Ls and separate personal withdrawals.
  • Don’t submit incomplete or illegible documentation. Sloppy packets extend timelines and lead to follow-up requests.
  • Don’t delay. Missing deadlines for requested financial information can let the IRS file liens or levy assets.

Common mistakes and how to avoid them

  • Mixing time periods: Use consistent months for bank statements and income reporting. If you provide 12 months of bank statements, make sure your P&L covers the same period.
  • Underreporting asset values: Be conservative but accurate—don’t hide equity in real property or accessible investments.
  • Ignoring seasonality: For seasonal businesses, include annualized figures and a clear explanation of month-to-month cash flow.
  • Relying on guesses: If you don’t have a document, explain why and provide the best available evidence (e.g., canceled checks, invoices).

Real-world, anonymized examples from practice

  • Example 1: A sole proprietor with fluctuating monthly income assembled a year-long P&L, bank reconciliations, and a month-by-month cash-flow projection. The IRS accepted an installment agreement with a three-month trial period rather than rejecting the proposal for being ‘unable to pay.’

  • Example 2: An owner who failed to disclose a second bank account was assessed additional penalties and had negotiations delayed six months while the IRS requested a cashier’s check to cover unpaid payroll taxes. Full disclosure would have avoided the setback.

When to get professional help

Hire a tax professional if your case includes:

  • Complex business finances or co‑owned assets.
  • Prior penalties, liens, or ongoing audits.
  • Potential criminal exposure (e.g., suspected fraud).

If you’re deciding whether to DIY or hire help, see our detailed comparison: “Hiring a Tax Resolution Firm vs DIY: A Cost-Benefit Checklist”. For cases involving liens, also read “How Tax Liens Affect Credit and Steps to Request a Withdrawal”. If communication with revenue agencies stalls, the Taxpayer Advocate Service can be a resource—learn more in “Understanding the Taxpayer Advocate Service and When to Contact Them”.

(Internal links: Hiring a Tax Resolution Firm vs DIY: https://finhelp.io/glossary/hiring-a-tax-resolution-firm-vs-diy-a-cost-benefit-checklist/, How Tax Liens Affect Credit: https://finhelp.io/glossary/how-tax-liens-affect-credit-and-steps-to-request-a-withdrawal/, Taxpayer Advocate Service: https://finhelp.io/glossary/understanding-the-taxpayer-advocate-service-and-when-to-contact-them/.)

Authoritative resources and citations

Final tips and professional disclaimer

Be honest, organized, and timely. The quality of your financial statement affects negotiation leverage, processing speed, and the likelihood of a favorable resolution. In practice, well-documented statements reduce back-and-forth with collection officers and limit the chance of missed deductions or incorrect income reporting.

This article is educational and not individualized tax advice. For guidance tailored to your situation, consult a qualified tax professional or attorney.