Preparing a Realistic Budget for an IRS Installment Proposal

Why a realistic budget matters

A clear, accurate budget helps the IRS evaluate your ability to pay and reduces the risk of default, collection action, or a rejected proposal. The IRS compares your numbers against its Collection Financial Standards when reviewing offers (see IRS guidance: https://www.irs.gov/businesses/small-businesses-self-employed/collection-financial-standards).

Step-by-step: build the budget

1. Gather documentation

• Pay stubs, bank statements, and deposit records for the last 2–3 months.
• Bills and statements: mortgage or rent, utilities, insurance, loan statements, child support, medical bills.
• Proof of irregular income (freelance receipts, 1099s) and any predictable seasonal changes.

1. Calculate dependable monthly income

• Use after-tax (net) income—actual amounts deposited or received.
• For variable income, average the last 6–12 months and document how you calculated the average.

1. List and categorize expenses

• Essentials: housing, utilities, food, transportation, required insurance, medically necessary costs, court-ordered payments.
• IRS-approved standards: compare your food, housing, and transportation numbers to the IRS Collection Financial Standards (IRS site) and explain any justified deviations.
• Discretionary expenses: streaming services, dining out, gym memberships—identify what you can reduce or suspend.

1. Apply conservative assumptions

• Don’t assume future pay raises or uncertain income. Use conservative estimates so your proposed payment remains affordable.

1. Determine a sustainable monthly payment

• Subtract total monthly expenses from net monthly income. The remainder is the realistic amount available for taxes.
• If that amount is small or zero, consider a Partial-Payment Installment Agreement or other relief—see our step-by-step guide on applying for a partial-payment plan: “How to Apply for a Partial-Payment Installment Agreement” (https://finhelp.io/glossary/how-to-apply-for-a-partial-payment-installment-agreement-a-step-by-step-guide/).

1. Prepare a written budget for the IRS

• Use a simple spreadsheet, label each line, and attach supporting statements. The IRS may request Form 433-F or bank records to verify.

Practical example

This “available for tax payment” figure is what you would propose as the monthly installment, adjusted for any IRS standards the examiner may apply.

Real-world tips from practice

• Be transparent and document everything. In my experience, examiners accept reasonable, documented variations from the standard tables more often than unsupported guesses.
• If self-employed, separate business and personal accounts and calculate a reliable owner’s draw instead of gross revenue.
• Consider short pauses on nonessential subscriptions and review insurance options before lowering necessary coverages.

Common mistakes to avoid

• Overstating ability to pay (promising more than you can sustain).
• Omitting recurring but infrequent expenses (annual insurance, car registration) — convert them to monthly amounts.
• Using gross income instead of net income.

When you can’t afford a full-payment plan

If your budget shows no realistic cash for full repayment, the IRS may accept a Partial-Payment Installment Agreement or place the account in currently not collectible status. Learn how the IRS evaluates monthly ability to pay in our deeper guide: “How the IRS Calculates Monthly Payment Ability for Installments” (https://finhelp.io/glossary/how-the-irs-calculates-monthly-payment-ability-for-installments/).

How to present the budget to the IRS

• Complete the required financial form if requested (Form 433-F is commonly used for collection reviews) and include your spreadsheet and supporting statements.
• If using the IRS Online Payment Agreement tool, be prepared to provide the same income and expense detail if the IRS requests verification (see IRS Online Payment Agreement guidance: https://www.irs.gov/payments/online-payment-agreement-application).

Quick checklist before submission

• Net income verified and averaged if variable.
• All essential expenses included and documented.
• Discretionary spending reduced and noted.
• Proposed payment matches what your bank records can sustain for the next 12 months.

Sources and further reading

• IRS: Understanding Installment Agreements (https://www.irs.gov/payments/understanding-installment-agreements)
• IRS: Collection Financial Standards (https://www.irs.gov/businesses/small-businesses-self-employed/collection-financial-standards)
• FinHelp guide: How to Apply for a Partial-Payment Installment Agreement (https://finhelp.io/glossary/how-to-apply-for-a-partial-payment-installment-agreement-a-step-by-step-guide/)
• FinHelp guide: How the IRS Calculates Monthly Payment Ability for Installments (https://finhelp.io/glossary/how-the-irs-calculates-monthly-payment-ability-for-installments/)

Professional disclaimer: This content is educational and not personalized tax advice. For tailored guidance, consult a CPA, enrolled agent, or tax attorney who can review your full financial picture and represent you with the IRS.