What Are IRS Form 433-A Allowable Expenses?

IRS Form 433-A, the Collection Information Statement, is a financial disclosure document the Internal Revenue Service uses to assess a taxpayer’s ability to pay an outstanding tax debt. The information provided helps the IRS determine eligibility for collection alternatives, such as an Offer in Compromise (OIC) or a Partial Payment Installment Agreement (PPIA). By analyzing income, assets, and living expenses, the agency can establish a collection solution that is feasible for the taxpayer while satisfying the tax obligation over time.

The IRS Collection Financial Standards Framework

The IRS utilizes a structured system known as the Collection Financial Standards to determine a taxpayer’s basic living expenses. This framework is not designed to account for every dollar an individual actually spends, but rather to apply a consistent and equitable measure across all cases. This ensures that determinations of a taxpayer’s ability to pay are fair and uniform.

This system is built upon two main categories of expense allowances: National Standards and Local Standards. National Standards provide fixed, nationwide allowances for certain types of expenses and are based on the taxpayer’s income and household size. In contrast, Local Standards account for geographical variations in the cost of living, with allowances that differ based on the taxpayer’s specific county of residence.

National and Local Standard Expenses

The National Standards consist of five categories: food, housekeeping supplies, apparel and services, personal care products and services, and a miscellaneous allowance. On Form 433-A, these are combined into a single line item for “Food, Clothing and Miscellaneous.” The IRS publishes the specific dollar amounts allowed annually, and taxpayers can find the current figures on the IRS website to apply to their situation.

Local Standards address expenses that have significant cost variations across the country, specifically Housing and Utilities, and Transportation. The Housing and Utilities standard sets a cap on allowable expenses for mortgage or rent payments, property taxes, insurance, maintenance, and utilities. This amount is determined by the taxpayer’s county of residence and family size. For Transportation, the standards provide a nationwide figure for public transit and a separate allowance for vehicle ownership and operating costs, which varies by region. These local standard amounts are maximums; the IRS will only allow the lesser of the standard amount or what the taxpayer actually pays.

Other Necessary and Conditional Expenses

Beyond the fixed National and Local Standards, the IRS allows for the deduction of other expenses that meet a “necessary expense test.” To be considered necessary, an expense must be for the health and welfare of the taxpayer and their family or for the production of income. These are evaluated on a case-by-case basis, require thorough justification, and the amounts claimed must be reasonable for the taxpayer’s circumstances.

Commonly allowed necessary expenses include out-of-pocket health care costs, such as health insurance premiums, co-pays for doctor visits, and prescription drug costs. Current and mandatory tax payments, including federal, state, and local income taxes that are withheld from wages or paid as estimated taxes, are also deductible. Legally mandated payments, such as court-ordered alimony or child support, are another category of necessary expenses. Additionally, the cost of child or dependent care is often allowed if it is a prerequisite for the taxpayer to be able to work and earn an income.

The IRS may also permit certain conditional expenses if the taxpayer can demonstrate that their tax liability can be fully paid within six years. These can include payments for student loans, term life insurance, or unsecured debts. The allowance of these expenses is not guaranteed and depends on the taxpayer’s ability to present a viable plan for satisfying their tax debt.

Required Documentation for Expenses

To substantiate the expenses claimed on Form 433-A, taxpayers must gather documentation. The IRS requires proof for most claimed expenses, particularly those under the Local Standards and “Other Necessary Expenses” categories. Taxpayers should be prepared to provide documents such as:

• Recent pay stubs and bank statements, typically covering the last three to six months
• Mortgage statements, lease agreements, or recent rent receipts
• Recent utility bills
• Car loan or lease statements and records of fuel, maintenance, and insurance costs
• Health insurance statements and receipts for significant medical or dental expenses
• Copies of court orders for payments like child support or alimony
• Copies of recent tax returns and proof of estimated tax payments

Completing the Expense Section of Form 433-A

When filling out Form 433-A, the gathered financial data is entered into Section 5, “Monthly Living Expenses.” The form has columns for both the actual amount paid for an expense and the amount allowed under IRS standards. Taxpayers should accurately report their actual monthly spending in the appropriate fields.

The National Standard amount for food, clothing, and miscellaneous items is entered on its designated line. For Local Standards, such as housing and transportation, the taxpayer enters their actual costs. Other necessary expenses, like healthcare, taxes, and court-ordered payments, are itemized in their respective lines.

Any expense that does not fit into a predefined category can be listed under “Other Expenses,” but it must be accompanied by a clear explanation and justification. After all expenses are entered, they are totaled and subtracted from the taxpayer’s total monthly income. This final calculation reveals the taxpayer’s monthly disposable income, which the IRS uses to determine the amount of a potential monthly payment plan.