The “Collection Information Statement” provides the foundation for any resolution you negotiate with the IRS, save for a full-pay streamlined or non-streamlined installment agreement; partial-pay installment agreements, Currently-Not-Collectible designations, and Offers in Compromise all generally require that a taxpayer submit a Collection Information Statement so that the IRS can review the taxpayer’s ability to pay and qualification for the requested collection alternative.

At its heart, the Collection Information Statement is a financial disclosure form focusing on two components of a taxpayer’s finances, their equity in assets and their monthly ability to pay.  Combined, they represent what the IRS refers to as a taxpayer’s “Reasonable Collection Potential,” and will ultimately determine what collection alternative may be available to resolve an outstanding tax liability.However, the IRS has intricate rules regarding what needs to be reported, how it should be reported, and what expenses are allowed to be deducted from your monthly household income.  They are generally laid out in Section 5.15.1 of the Internal Revenue Manual, though the IRM can be dense and difficult to navigate for the uninitiated, and oftentimes rules are modified by Tax Court rulings that aren’t reflected in the currently-published version of the IRM.  Furthermore, situations where one spouse is liable for taxes while the other is not, especially where spouses live in community property states, can further complicate the process of accurately completing the forms.

A detailed and up-to-date understanding of how to complete the Collection Information Statement can mean the difference between an Offer in Compromise getting accepted or rejected, or a Currently Not Collectible designation rather than an Installment Agreement.  Furthermore, many IRS employees, across the spectrum of collection agents, do not know or otherwise have an incorrect understanding of numerous provisions of the Internal Revenue Manual that apply to Collection Information Statements, so relying on IRS employees for guidance on the completion of the form is generally inadvisable.It is important to recognize that the IRS uses historical income information reported on the Collection Information Statement to try and predict a taxpayer’s income in the future.  This means that by the time the IRS reaches out to a taxpayer and requests that they provide a CIS, it is often too late to rearrange one’s financial affairs to better comport with the IRS’s collection guidelines.  Therefore, if you find yourself in a situation where the IRS is likely to require the completion of a Collection Information Statement, it’s beneficial to review your expenditures against IRS standards for allowable expenses in order to see if personal finances can be rearranged to better take advantage of IRS allowances prior to reaching out to the IRS to negotiate a resolution.

In general, the IRS allows a taxpayer to subtract the following expenses from their gross household income to determine the taxpayer’s monthly ability to pay:

1. Food, Clothing, and Miscellaneous Personal Expenses

2. Transportation Expenses (both Vehicle Ownership and Operating Expenses)

3. Housing and Utilities Expenses

4. Medical Expenses (both Health Insurance and Out-of-Pocket Healthcare Expenses)

5. Child / Dependent Care Expenses

6. Current-year Withholding or Estimated Tax Payment Obligations

7. Term Life Insurance Premiums (Premiums on whole life policies are not allowable)

8. Employer-required Retirement Contributions

9. Union Dues

10. Delinquent State and Local Tax Payments

11. Student Loan Payments (minimum payment only and must be federally-backed)

12. Court Order Payments (such as Child Support or Alimony)

13. Certain Payments on Secured Debt with Priority Over IRS Debts

This list is not exhaustive, and within each expense category, there is some leeway as to what can be included within each expense category.  Generally speaking, unless a taxpayer is willing to commit to an installment agreement that will satisfy the tax debt in full over 72 months, the IRS will allow the actual amount spent in each expense category or the IRS standard, whichever is less.  Some of the standards are national standards, while others are based on the taxpayer’s location within the country.  A complete list of IRS standard allowances for the various expense categories is available here.

Which Form Should You Use:

The IRS has promulgated a number of Forms which all fall under the umbrella of the “Collection Information Statement.”  The type of form that the IRS will require you to use depends largely on your individual situation.

Form 433-F: Form 433-F is the most simplified version of the Collection Information Statement provided by the IRS.  Form 433-F is generally used when a taxpayer’s balance owing to the IRS is less than $250,000 and their case has not been assigned to a Revenue Officer.  Form 433-F is generally the form that would be used to negotiate a collection alternative (either an installment agreement or Currently Not Collectible designation) with IRS Automated Collection System (ACS) call center employees, or to request an installment agreement by mail via Form 9465.

Form 433-A: Form 433-A is a more complex disclosure form than the 433-F, as it requests more granular asset, income, and expense information, as well as a series of other financial questions not present on Form 433-F, such as questions related to pending or prior lawsuits, bankruptcies, etc. Form 433-A is generally required to negotiate a resolution with the IRS once a Revenue Officer has been assigned to your case.

Form 433-B: Form 433-B is a collection information statement specifically designed for businesses to provide a financial disclosure to the IRS for the purposes of resolving business tax liabilities (corporate income tax, payroll tax, unemployment tax, etc.).  The form primarily focuses on business assets (including real property and accounts receivable), as well as business income and expenses.  However, unlike the personal Collection Information Statement, the IRS does not proscribe standard expense allowances; so long as the expenses are reasonably necessary for the operation of the business, the IRS will generally allow them in full.  Furthermore, the IRS will generally not require the business to liquidate assets that are related to the production of business income, so long as the value of the asset is reasonable in relation to its income-producing potential.  Form 433-B generally allows you to use the prior 3, 6, 9, or 12 month period to determine your typical business income and expenses.  This gives a business taxpayer a good amount of leeway in framing the income and expenses of the business, and careful consideration should be given towards which period should be used to reflect the income and expenses of the business to optimize the potential for a successful resolution with the IRS.

Form 433-A (OIC) & Form 433-B (OIC): Forms 433-A (OIC) and 433-B (OIC) are largely identical to their similarly-named forms above, except these are the Collection Information Statements that need to be included with the submission of an Offer in Compromise.  Form 433-A (OIC) is submitted along with Form 656 to initiate a request for a Offer in Compromise for personal taxes, while Form 433-B (OIC) is submitted along with Form 656-B to initiate a request for an Offer in Compromise to settle business taxes.

The Collection Information Statement is the most critical piece of information submitted by a taxpayer to the IRS when negotiating a Collection Alternative.  It provides the basis from which the IRS will work to determine how much they believe you can afford to repay, and over what time frame.  Properly preparing the Collection Information Statement to reflect your finances in a way that optimizes your chance for a successful outcome, as well as being ready to defend the figures listed on the Collection Information Statement with detailed and organized supporting documents are two key components to successfully resolving your tax situation with the IRS.  Hiring an experienced tax professional who can complete the Collection Information Statement, anticipate potential items of disagreement with the IRS, and predict likely outcomes before initiating contact with the IRS can give you the upper hand in negotiating with the IRS.  At O’Connor & Lyon, we have the experience and know-how to prepare the requisite CIS form on your behalf, advise you on likely outcomes based on the results of the financial analysis, and successfully argue on your behalf for the best resolution possible given your individual financial situation.