Representation before the IRS · Taxpayer financial situation

Taxpayer's ability to pay the tax

The rule

“Ability to pay” is not a mood or an argument. It is an arithmetic output, and IRM 5.15.1.3 states the formula in a sentence: analyse income and expenses to determine the amount of disposable income — gross income less all allowable expenses — available to apply toward the outstanding tax liability. Everything a representative does in a collection case is either an input to that subtraction or an argument about one of its terms.

There is a second number, and taxpayers consistently forget it. Disposable income answers what the taxpayer can pay going forward. Equity in assets answers what the taxpayer can pay now. IRM 5.15.1.3 directs the collection employee through an escalating sequence: request immediate payment if the taxpayer has cash or liquid assets equal to the total liability; request full payment if equity in assets equals or exceeds the liability and the asset can be sold or borrowed against without causing a hardship; request partial payment where liquid assets or equity in non-liquid assets can reduce the liability “to the maximum extent achievable given the taxpayer’s circumstance.” The 29 June 2026 revision of the IRM sharpened this further, adding an express expectation that a taxpayer use equity in assets toward the liability before other collection alternatives are considered.

Those two numbers then select the resolution. Where disposable income can retire the balance within the statute, the answer is an installment agreement (IRC § 6159). Where neither income nor equity can — and the taxpayer’s reasonable collection potential is genuinely less than the liability — the answer is an offer in compromise on doubt as to collectibility (IRC § 7122). Where allowable expenses equal or exceed income and there is no reachable equity, the answer is currently not collectible status. The representative’s job is to compute the numbers honestly first and pick the label second, not the reverse.

The financial statement is the vehicle. Individuals file Form 433-A, or the shorter Form 433-F where the case is worked at a campus; businesses file Form 433-B; the (OIC) variants apply where an offer is contemplated. A simple installment agreement for an aggregate unpaid balance of $50,000 or less aggregate unpaid balance of assessment^TY2026 generally requires no statement at all, which is why the threshold question in every collection case is whether a financial statement is needed before it is whether it is favourable.

Current figures

The allowable-expense side of the subtraction is set by the Collection Financial Standards, which are covered separately.

How it works in practice

Verification comes before analysis. IRM 5.15.1.4 sets the documentation review a collection employee performs, which tells a representative what to assemble before filing rather than after being asked. Wage statements for the prior three months, or a current year-to-date figure, with average earnings compared against the statement and withholding checked for adequacy. Cancelled checks and credit card statements for the last three months, to verify the amount and frequency of declared expenses and reconcile them against returns and invoices. Bank statements, reviewed for repeated incoming payments that suggest unreported income. Retirement, brokerage and other investment account statements.

Three months is the ordinary review window, but it is not a fixed rule. Where either the taxpayer or the IRS believes three months of expenses are not representative of actual annual expenditure, additional months up to one year may be reviewed (IRM 5.15.1.8). That door opens in both directions: it is the correct answer to a quarter distorted by a one-off medical event, and it is also how the IRS responds to a taxpayer who front-loads expenses into the review period.

Smoothing is required, not optional. Necessary living expenses that are not paid in equal monthly increments must be averaged over twelve months (IRM 5.15.1.3). Car insurance paid quarterly, a semi-annual property tax bill, an annual professional licence — total the year and divide by twelve. A statement that shows the actual cash outflow of a heavy month will be recomputed.

The interview is substantive. IRM 5.15.1.4 lists the questions a revenue officer is expected to ask individual taxpayers: sources of income; real property, including property outside the United States; personal assets such as vehicles and boats; investments including retirement accounts; whether mortgage or rent obligations are being met and how necessary expenses are paid; and whether they own any digital assets. Business taxpayers face a parallel list about how income is generated, whether customers recur, foreign-source income, whether virtual currency is accepted as compensation, and internet presence. Absent a safety concern, an appointment to visit a business taxpayer must now be made to observe the physical layout, the number of employees, and the condition of business assets.

Certain expenses are allowed on conditions worth knowing. IRM 5.15.1.11’s table is the working list. Representation fees are allowable where they are for representation before the IRS or otherwise meet the necessary expense test, in a reasonable amount — but fees related to business operations reported on Schedule C are not personal expenses. Charitable contributions are allowed only where giving is a condition of employment or independently meets the test. Court-ordered alimony and child support are allowable if actually being paid, with non-payment excused only for temporary job loss or illness. Life insurance is allowable if it is a term policy on the taxpayer’s life alone; whole life policies are reviewed as an asset to borrow against or liquidate. Credit cards are treated as a method of payment rather than an expense.

How this has changed

The analytical framework — disposable income plus equity, verified against three months of documents, measured against standardised allowable expenses — has been stable since the Collection Financial Standards were introduced in the 1990s and the IRM’s Financial Analysis Handbook took its present shape. What the 29 June 2026 revision changed is emphasis, and the emphasis moved toward assets and toward observation.

The revision added an express expectation that a taxpayer use equity in assets toward satisfying the liability before other collection alternatives are considered, and added forced sale value and reduced forced sale value guidance to the asset analysis. It expanded the digital assets section and added digital asset ownership to the questions asked of individual taxpayers. It directed employees to research peer-to-peer payment and online gambling applications when reviewing bank statements, since repeated incoming payments can indicate income activity and balances may be parked in the applications themselves. It made a field visit mandatory for business taxpayers absent a safety concern, and added field visits to view the condition of vehicles, vessels, aircraft and real estate when valuing them.

Together these point one way: the 2026 handbook expects more independent verification and less reliance on the taxpayer’s own presentation of what an asset is worth.

Exam focus

The SEE tests this outline item procedurally rather than numerically. Expect a question on how many months of income and spending documentation a Collection Information Statement is supported by — three is the ordinary answer — and a question on which events suspend the collection statute, where currently not collectible status is the distractor that does not. Know that hardship status stops levy but not accrual, offset, or the clock. Know the escalating asset sequence: immediate payment from liquid assets, full payment from equity, partial payment to the maximum extent achievable. And know that the resolution is chosen by the arithmetic, not the other way round.

Check yourself

1. A Collection Information Statement is ordinarily supported by income and spending documentation covering what period?

A. The prior three months B. The prior six months C. The prior twelve months in every case D. The full period since the balance arose

Answer: A. Wage statements for the prior three months and cancelled checks and credit card statements for the last three months are the ordinary review, though additional months up to one year may be reviewed where three are not representative.

2. Which of the following does not suspend the collection statute expiration date?

A. A bankruptcy case B. A pending collection due process hearing C. Currently not collectible status D. A continuous absence from the United States of at least six months

Answer: C. Hardship status halts collection activity but has no statutory suspension provision; the clock continues to run while the account sits.

3. A taxpayer has an installment agreement in effect and is making payments on time. What is the effect on the collection period?

A. It is suspended for as long as the agreement is in effect B. It continues to run C. It is suspended for the first year only D. It is extended by the length of the agreement automatically

Answer: B. Levy is prohibited while an agreement is in effect, but the statutory suspension that accompanies the other levy prohibitions is expressly withheld from that one period.

4. A taxpayer pays car insurance twice a year. How is it entered on the financial statement?

A. In the months the premium is actually paid B. Only if the vehicle is required for employment C. Averaged over twelve months D. It is covered by the transportation standard and not listed

Answer: C. Necessary living expenses with varying monthly payments are totalled for the year and divided by twelve.

5. A taxpayer with almost no disposable income owns unencumbered land she does not use, worth more than the balance owed. What should the representative expect?

A. An offer in compromise will be accepted because monthly income is insufficient B. The equity will have to be addressed before other collection alternatives are considered C. The land is disregarded because it produces no income D. Hardship status follows automatically from the low disposable income

Answer: B. Where equity in assets equals or exceeds the liability and the asset can be sold or borrowed against without hardship, full payment is requested before alternatives are considered.