A taxpayer owes $68,000 and hands you a shoebox. Before you can name a collection alternative, you have to price the household: what it earns, what it owns, and what the IRS will let it spend.
When a taxpayer can't pay a balance in full, the IRS decides what to accept by looking at a financial disclosure called a Collection Information Statement. Every collection alternative runs off this same disclosure, because it shows the taxpayer's ability to pay the tax.
The statement comes in three versions. Form 433-A is for individuals and self-employed wage earners, Form 433-B is for businesses, and Form 433-F is the shorter version used by the Automated Collection System. All three measure the same two quantities, one drawn from the taxpayer's assets and one from income.
These two quantities decide every case:
- Equity in assets: the quick-sale or realizable value of everything the taxpayer owns, less encumbrances (loans and liens against the property).
- Monthly disposable income: gross monthly income less allowable living expenses. It's what is left over each month that could go toward the tax.
Common mistakes
- Allowing actual housing over the standard. Using the $2,380 actual cost instead of the $1,950 Local Standard understates disposable income by $430 a month. That understates a 12-month offer by $5,160.
- Using 24 months for a lump-sum offer. The 24-month multiplier belongs to periodic-payment offers only. A lump-sum cash offer counts 12 months of future income.
- Treating assessed value as market value. Suppose a county property assessment for taxes shows a $120,000 assessment at a 40% ratio. That implies $300,000 of market value, not $120,000.
Bottom line
- Reasonable collection potential equals net realizable equity plus future income; it drives installment agreements, offers in compromise, and currently not collectible status alike.
- Lump-sum cash offer equals equity plus 12 months of disposable income; periodic-payment offer equals equity plus 24 months.
- National Standards allow the published amount without receipts; Local Standards for housing, utilities, and transportation allow the lesser of actual or the cap.
- Guaranteed installment agreements cover $10,000 or less paid in 36 months; the simple payment plan (formerly streamlined) covers $50,000 or less, paid by the CSED with no fixed term and no direct debit requirement.
Exam shortcut
Read the stem for the number the question actually wants. A dollar figure plus "minimum acceptable offer" means build RCP: cap the housing and transportation lines at the IRS Collection Financial Standards first, then pick the 12 or 24 multiplier from the payment terms in the stem, never from the offer's size. Bankruptcy dates: write the three windows down before answering, and take the latest of the three.
The full lesson (about 4,063 words, 27 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- 3
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