Why a personal financial statement matters

A PFS is more than a bookkeeping exercise—it’s the primary way the IRS determines whether you can pay a tax liability now, over time, or not at all. The Collection Financial Standards and IRS collection procedures guide how examiners evaluate what expenses are necessary and what income is collectible (see the IRS Collection Financial Standards). A clear, accurate PFS improves your credibility, speeds reviews, and increases the chance of a favorable outcome like an installment agreement or an offer in compromise (OIC) (see IRS Offer in Compromise guidance).

In my practice working with taxpayers for 15 years, the difference between an accepted and a denied settlement often boiled down to how well the PFS documented unavoidable costs and verifiable assets. Overstated expenses or unverified claims tend to trigger requests for documentation and delay or derail negotiations.

Who uses a PFS and when

  • Taxpayers submitting an Offer in Compromise (Form 656) usually include a PFS and a Collection Information Statement—Form 433-A (for individuals) or Form 433-F (simpler format). (IRS forms pages: Form 656, Form 433-A, Form 433-F.)
  • Taxpayers requesting a partial-payment installment agreement or currently not collectible status also need a thorough PFS so the IRS can calculate Reasonable Collection Potential (RCP).
  • Financial statements are required when the IRS requests a full financial disclosure during collection actions (levy, lien considerations).

What to include: a practical checklist

Required sections and recommended supporting documents:

  1. Identification and contact details
  • Full legal name, SSN or ITIN, current address, and primary phone.
  • Driver’s license or government ID for verification.
  1. Assets (with documentation)
  • Cash and checking/savings balances (bank statements — last 2–3 months).
  • Brokerage and retirement accounts (statements). Note: retirement accounts may be protected but are still reported.
  • Real estate (address, fair market value, mortgage balances — appraisal, Zillow/county records, mortgage statement).
  • Vehicles (year, make, model, loan balance — title or loan statement).
  • Personal property of significant value (business equipment, jewelry, etc.) — receipts or appraisals.
  1. Liabilities (with proof)
  • Mortgage statements, auto loans, student loans, personal loans, credit card statements.
  • Tax liens, child support, alimony — court orders or statements.
  1. Income (current and predictable sources)
  • Pay stubs (last 2–3 months), year-to-date earnings, employer contact.
  • Self-employment: profit & loss statement, bank deposits, 1099s.
  • Rental, investment, Social Security, unemployment benefits — corresponding statements or award letters.
  1. Monthly expenses (itemized, necessary vs. discretionary)
  • Housing: rent or mortgage principal/interest, insurance, property tax.
  • Utilities, food, transportation, insurance premiums, medical expenses, child care, required minimum loan payments.
  • Document recurring payments with bills, canceled checks, or bank statements.
  1. Summary calculations
  • Total assets, total liabilities, monthly net income, monthly necessary expenses, disposable income, and net worth.
  • Show calculations so an IRS reviewer can follow how you reached the figure.

How the IRS evaluates your PFS

  • Reasonable Collection Potential (RCP): For OIC and other evaluations, the IRS calculates RCP using the equity in assets plus a multiple of monthly disposable income. A complete PFS lets the IRS apply Collection Financial Standards fairly (see IRS Collection Financial Standards).
  • Verification: The IRS often verifies bank balances, mortgage balances, and pay stubs. Unverified or inconsistent items are discounted or disallowed.
  • Necessary vs. discretionary expenses: The IRS uses national and local standards to determine reasonable living expenses. Make sure you can document exceptions (e.g., unusually high medical costs).

How to present numbers so they pass scrutiny

  • Use the IRS forms where applicable: Form 433-F is faster and may be accepted for many collection cases, but Form 433-A is the more detailed, traditional form for individuals and self-employed taxpayers. Filing your data on these forms reduces back-and-forth and aligns your values with IRS expectations.
  • Round conservatively: list actual balances rather than estimates when possible. If you must estimate, explain your method and keep supporting documents ready.
  • Label required vs. optional items: note which monthly costs are statutory (child support, court-ordered payments) or unusually high medical bills and provide documentation.

Common mistakes and how to avoid them

  • Omitting small assets: Even modest savings, retirement accounts, or cosigned assets should be reported. Omissions may be seen as bad faith.
  • Inflating expenses or hiding income: The IRS cross-checks multiple sources. Inaccurate reporting can lead to penalties or denial of relief.
  • Using outdated statements: Use the most recent documents. In many cases the IRS expects bank statements within 30–60 days of submission.
  • Not updating the PFS when circumstances change: If your situation materially changes (job loss, major medical expense), notify the IRS promptly and submit an amended PFS.

Example: How a PFS can change results

A client owed $40,000 and initially submitted a PFS showing high discretionary expenses without documentation and was denied. We reworked the statement to show verified monthly mortgage, utilities, necessary insurance, and documented child-care expenses plus current bank balances. The IRS recalculated their RCP and accepted an OIC of $10,000. The turning point was verifiable documentation and clear separation of necessary vs. discretionary expenses.

Documentation checklist to attach

  • Last 2–3 months of bank statements
  • Pay stubs (last 2–3 months) or current profit/loss for self-employed
  • Recent mortgage/loan statements
  • Appraisals or market value estimates for real estate and vehicles
  • Court orders (child support, alimony)
  • Proof of large medical expenses or disability benefits

For a focused list when preparing an OIC package, see our Preparing an Offer in Compromise: Documentation Checklist.

Alternatives and related resources

If you don’t qualify for an OIC, other options include installment agreements or currently not collectible status. Our guide on Choosing Between an Installment Agreement and an Offer in Compromise explains trade-offs between payment plans and settlement offers.

If assembling the PFS feels overwhelming, review our targeted piece on Preparing the Financial Statement for an Offer in Compromise for step-by-step examples.

Professional tips from practice

  • Create a PFS draft before you talk to the IRS. Most collection officers expect the figures to be complete and supported.
  • Keep an organized binder (or digital folder) with the documents above so you can respond quickly to verification requests.
  • If self-employed with fluctuating income, provide a 12-month average, profit-and-loss statements, and bank deposit records to demonstrate typical cash flow.
  • Consider professional help for complex asset structures (business ownership, trusts, multiple properties). In my experience, professional preparation reduces the likelihood of denial and shortens negotiation timelines.

Legal and practical disclaimers

This article is educational and does not replace personalized legal or tax advice. The IRS updates procedures and standards; always confirm current forms and standards on the IRS website (https://www.irs.gov) and consult a qualified tax professional when preparing a PFS for negotiations.

Authoritative sources

If you’d like, I can convert this checklist into a printable PFS template or walk through a sample PFS using redacted figures from a hypothetical taxpayer to show exact calculations.