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
- 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.
- 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.
- 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.
- Apply conservative assumptions
- Don’t assume future pay raises or uncertain income. Use conservative estimates so your proposed payment remains affordable.
- 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/).
- 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
| Category | Monthly Amount |
|---|---|
| Net income | $4,500 |
| Rent/mortgage | $1,400 |
| Utilities | $300 |
| Food | $600 |
| Transportation | $350 |
| Insurance/medical | $300 |
| Minimum debt payments | $350 |
| Discretionary | $200 |
| Available for tax payment | $1,000 |
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.
