Overview
Collection Financial Standards are the IRS’s standardized rules for determining what counts as reasonable living expenses when evaluating a taxpayer’s ability to pay past-due taxes. The IRS uses these standards to calculate “monthly disposable income”—the amount left after allowable expenses—which drives collection decisions like installment agreements, currently-not-collectible status, liens, and Offers in Compromise (OIC). For the latest official list and updates, see the IRS Collection Financial Standards page (IRS.gov).
Why this matters: the standards can materially change whether the IRS views a taxpayer as able to pay the full balance, makes a lower monthly payment required, or accepts a compromise. In my practice working with individuals and small-business owners for over 15 years, careful application of these standards frequently improves negotiation outcomes by showing the IRS a realistic budget.
Sources: IRS Collection Financial Standards (individuals) — https://www.irs.gov/individuals/collection-financial-standards; Form 433-A and Form 433-B instructions — https://www.irs.gov/pub/irs-pdf/f433a.pdf and https://www.irs.gov/pub/irs-pdf/f433b.pdf.
How the standards are structured
The IRS divides Collection Financial Standards into two main buckets:
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National Standards: Uniform allowances for categories such as food, clothing, household supplies, and health care. These numbers are the same nationwide and are updated periodically.
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Local Standards: Region- and county-specific allowances for housing and utilities (rent, mortgage, property taxes, homeowner insurance and utilities). These reflect geographic cost differences; for example, housing allowances in high-cost counties are higher than in rural areas.
Collection Financial Standards are not exhaustive: certain necessary expenses that don’t fit neatly into the predefined categories (like out-of-pocket medical costs, child support, or required work-related expenses) may be considered separately by a Revenue Officer or examiner if you provide supporting documentation.
What expenses the IRS allows (common categories)
- Food, clothing, and miscellaneous (national)
- Out-of-pocket health care (national)
- Housing and utilities (local)
- Transportation (national)
- Other allowed expenses with documentation: child care, court-ordered payments, certain work-related costs, and some uninsured medical expenses
Note: The IRS provides tables for these amounts; they change annually. Use the IRS site and the current Forms 433 series to confirm figures before submitting a financial package. (See IRS forms: Form 433-A (individuals) and Form 433-B (business) — https://www.irs.gov.)
How the IRS calculates “ability to pay” (step-by-step)
- Determine monthly gross income: wage income, self-employment receipts (net), retirement, Social Security, and other sources.
- Subtract required payroll taxes and mandatory deductions (where applicable).
- Apply the Collection Financial Standards for national and local expense categories to set allowable living costs.
- Subtract allowances and any documented necessary expenses from monthly income to arrive at monthly disposable income.
- Multiplied by the number of months remaining in the collection period (or per IRS formulas), disposable income informs what the IRS expects in a lump-sum or monthly offer.
Example calculation (simplified):
- Monthly income (net) = $3,000
- National standards for food, clothing, healthcare = $650
- Local housing & utilities allowance = $1,200
- Transportation = $200
- Disposable income = 3,000 – (650 + 1,200 + 200) = -50 (zero or capped at $0)
In this example, the taxpayer shows no disposable income under the standards and would likely be considered unable to pay a full monthly installment or lump-sum, opening options for an OIC, Currently Not Collectible (CNC) status, or a low monthly payment.
Who uses Collection Financial Standards inside the IRS?
- Automated systems that screen Offers in Compromise and payment proposals;
- Revenue Officers and Collection staff handling collection cases;
- IRS examiners when requesting a financial status from a taxpayer (Form 433 series).
A Revenue Officer can accept or adjust the standards based on documented, reasonable deviations—so accurate records matter.
Real-world considerations and professional guidance
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Documentation is critical. The IRS often asks for proof: leases, utility bills, paystubs, bank statements, court orders for child support, medical bills, and business records. Without documentation, allowable expenses can be challenged.
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Local standards matter more than you might think. In high-rent or high-cost counties, the housing and utilities allowance can be substantially larger than the national average. If your original proposal used national housing figures, request a local standard review.
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Self-employed taxpayers must provide a credible profit-and-loss or cash-flow statement. The IRS looks at net income after ordinary and necessary business expenses—not gross sales.
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Revisit the standards annually. Because the IRS updates these numbers, a case that looked poor one year might improve after a standard change (or vice versa).
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Use the standards strategically in Offers in Compromise. If you are preparing an OIC, the Collection Financial Standards form the baseline the IRS applies. See our guidance on what to include in a financial disclosure and how to prepare a strong financial package: Preparing a Strong Financial Package for an Offer in Compromise and What Is an Offer in Compromise and How It Works.
Common mistakes and misconceptions
- Assuming the IRS will accept your actual bills without comparing them to standards. The IRS starts with the standards; you must prove any higher necessary expense.
- Forgetting to include nonstandard but required expenses (medical debt, court-ordered payments) with documentation.
- Using gross income figures for self-employed filers instead of net income after legitimate business expenses.
- Not updating a financial package after a change in income, household composition, or IRS standards.
Practical steps to prepare a financial package (checklist)
- Download the current Collection Financial Standards from the IRS website and identify national vs local numbers for your county. (IRS: https://www.irs.gov/individuals/collection-financial-standards)
- Complete the relevant Form 433 (433-F/433-A/433-B) honestly and attach supporting documents.
- Gather proof for every claimed expense: lease/mortgage statement, utility bills, medical invoices, child support orders, insurance premiums, pay statements, bank statements.
- If self-employed, prepare a monthly profit-and-loss and business bank statements showing cash flow.
- If filing an Offer in Compromise, use the standards to calculate reasonable monthly disposable income and review side-by-side with your offer amount. See: Preparing a Financial Disclosure Package for an Offer in Compromise.
What to expect after submission
- The IRS reviews the financial disclosure; automated screenings apply the Collection Financial Standards.
- A Revenue Officer may request additional documentation or schedule a call/meeting.
- Outcomes include acceptance of a payment plan, placement in Currently Not Collectible status, acceptance of an Offer in Compromise, or a denial that provides a basis for appeal.
Timeframes vary—OICs can take several months to a year depending on complexity and IRS workload.
Frequently asked questions
Q: Are the Collection Financial Standards the only measure the IRS uses?
A: No. The standards are the baseline. The IRS also considers documented unusual or necessary expenses and the taxpayer’s overall ability to pay.
Q: Can a Revenue Officer change the standards?
A: Yes. A Revenue Officer can accept, modify, or allow exceptions when presented with credible documentation of necessary expenses beyond the standards.
Q: How often are the standards updated?
A: Typically annually. Always use the current tables on IRS.gov when preparing a financial package.
Professional disclaimer
This article is educational and does not constitute tax advice. Each taxpayer’s situation is unique. For tailored guidance, consult a qualified tax professional, CPA, or enrolled agent familiar with IRS collections.
Sources and further reading
- IRS — Collection Financial Standards (individuals): https://www.irs.gov/individuals/collection-financial-standards
- IRS — Form 433-A (Collection Information Statement for Wage Earners and Self-Employed Individuals): https://www.irs.gov/pub/irs-pdf/f433a.pdf
- IRS — Form 433-B (Collection Information Statement for Businesses): https://www.irs.gov/pub/irs-pdf/f433b.pdf
- FinHelp guides: What Is an Offer in Compromise and How It Works, Preparing a Strong Financial Package for an Offer in Compromise, Preparing a Financial Disclosure Package for an Offer in Compromise.
If you’re preparing a financial disclosure for the IRS, start by downloading the current Collection Financial Standards and building documentation around each line item. Accurate preparation improves credibility and increases the chance of a reasonable collection outcome.
