How the IRS Decides Your Ability to Pay When You Owe Taxes

If you owe the IRS money, you’re probably constantly thinking about it. Worrying about your tax debt can be stressful and overwhelming if you know that you don’t have a way to pay it off. 

Many taxpayers are surprised to learn that the IRS actually provides a little bit of leeway for people who are unable to pay what they owe. The IRS does have some strict requirements when it comes to determining who isn’t in a position to pay a full tax bill, however, so take a look at the information we’ve compiled below if you’re considering asking the IRS for debt relief. Don’t forget that relief options are only available if all past returns are filed!

The Form 433 Series: A, B, and F

The IRS uses a series of Form 433s to determine eligibility for relief based on a taxpayer’s ability to pay. You may hear the full series referred to as a Collection Information Statement (CIS). While the 433 F is the most important form for most taxpayers, you may need to pay attention to other documents in the series depending on how you earn income. 

Form 433 A is used exclusively for self-employed individuals, while Form 433 B is only used for tax debts tied to a business. The IRS uses these documents to determine if you qualify for a pay-collection alternative. Form 433 F can be used by either wage earners or self-employed individuals; it’s the most commonly seen Collection Information Statement.

It All Comes Down to IRS Form 433 and Your Collection Information Statement

You will most likely use Form 433 F if you need to ask the IRS for help with paying off a debtThe good news is that you can usually get this two-page form filled out and submitted relatively quickly with help from a tax professional. 

What is Form 433 F used for? You can look at this form as the IRS’s eligibility metric for determining if you qualify for debt relief. The IRS is essentially looking at your income and assets to determine how realistically you can pay back what you owe.

The IRS would rather get something from you. From their perspective, it’s better to begin collecting some money from you as opposed to spending time and energy tracking you down for late payments. In fact, the IRS has a variety of payment options that will allow you to pay back what you owe over time. Qualifying for relief may mean having debt reduced or frozen. The bottom line is that it’s worth seeing if you qualify for debt relief if you’re struggling to get a tax bill paid in full.

Preparing the Form 433 Series

You aren’t just “filling in documents” when completing your Form 433 series. Every piece of information you provide must be backed up by documentation! Be ready to pull up bank statements, pay stubs, information related to any businesses you own, and much more. Your ability to qualify for relief hinges on your willingness to provide honest, accurate information. You’ll jeopardize your eligibility if you provide false or inaccurate information to the IRS on any of your Form 433 documents. 

Now, let’s cover what to expect as you fill out your form.

How to Fill Out Your Form 433 

Starting the process is fairly simple regardless of which form you use. You’ll need to fill out your name, address, and Social Security number. Business ownerswill need to supply EINs and information regarding the size of their businesses.

The IRS will also want to know about any lines of credit or asset sources you have. This will help them to determine if you have the ability to pull funds or funding from someplace to cover your debt. Additionally, the IRS will be inquiring about any properties you own. This includes primary residences, investment properties, and vacation homes. Be prepared to supply information regarding purchase price, current value, and equity. You will also be asked to share information about credit cards and current balances.

If you owe other personal or business assets, this is the time to talk about them. The IRS will ask you to detail anything like a boat, car, or insurance policy in your name. If you’re a business owner, the IRS wants to know about things like inventory, assets, liabilities, employees, and pending lawsuits. 

The IRS also wants to know about your employment status. You’ll need to share the name of your employer, your payment schedule, your wages and the amount that’s removed for taxes each pay period. If you have non-wage household income, the IRS will need to know about that. This can include things like child support, unemployment payments, Social Security payments, and passive income. 

Showing the IRS Your Ability to Pay

Sections 5 of Forms 433 A and 433 B and Section H of Form 433 F are where you’ll list all of your costs of living and/or business expenses to help the IRS determine if you can realistically pay down your tax debt. Don’t embellish this section, as the IRS may ask for proof regarding every expense you list in this section down the road. 

If you’re a wage earner or self-employed individual filling out Form 433 F, the IRS will want to know about:

• Food
• Clothing
• Personal care
• Transportation
• Health insurance
• Medical expenses
• Utilities
• Rent/mortgage
• Childcare costs
• Court-ordered payments
  

If you’re a business owner filling out Form 433 B, or a self-employed individual filling out Form 433 A, the IRS will also want to know about: 

• Net business income
• Rental income
• Wages 
• Gross receipts
• Inventory costs 
• Repair costs
• Dividends 

The IRS will use information regarding payments and assets from the top of your form to determine what these living/business expenses mean for your ability to pay. It uses a formula based on standard cost of living to ensure that you aren’t stuck paying more than is “reasonable” under the law. That means that you’ll likely qualify for relief if your monthly living expenses combined with your tax debt would tip you over the edge.

Submitting Your Collection Information Statement

Once completed, your forms can be sent to the IRS. There’s no need to send any supporting documents along to the IRS with your application. If the IRS needs proof or clarification, they will contact you.

What Happens After You Send Your Forms?

The IRS will review your documents once they are received. You should hear back shortly regarding the decision. The good news is that the IRS will stop all collection activity immediately if it’s determined that you qualify. However, make sure you’re addressing the potential for future liens or collection activities with a tax professional. 

Keep in mind that the IRS does have the right to review your case in the future to determine if you’re still eligible based on changing financial circumstances. 

Get Help With Debt Relief From Tax Professionals

The team at Tax Group Center helps taxpayers successfully complete Collection Information Statements every day! If you’re unable to pay your taxes, we can help you submit applications for relief options like an Installment Agreements(AI), Currently Non Collectable (CNC) status, and Offer In Compromise (OIC) along with your statement. Reach out today to explore options for reducing or freezing IRS tax debt!