When you go into battle with the most aggressive and hostile collection agency on the planet, you must be ready. Here’s where to start if you will battle with the IRS.
Your most important weapon is IRS 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals. It is where the war on your income and expenses will be waged. Lose here and your chances of a comeback are slim and few.
This meant you and your finances must go to boot camp to get ready for the conflict. Trust me when I tell you it’s impossible to put too much effort into IRS Form 433-A.
Your first step is to make a list of your income sources and your expenses. If you have multiple income streams, review your last 12 months of bank statement … this is what the IRS will do.
Remember all deposits are income unless you can prove otherwise. For example, if friends and family have lent you money, have the loan agreements and cancelled checks ready.
Now, compare your actual expenses to your allowed expenses. This is quite involved and there are a number of articles on this site on your expenses.
Let me note you are only allowed expenses necessary to live (at a minimal standard), those for the production of income (business expenses), and legal obligations (child support and other secured debts or court-ordered payments).
For example, you are not legally obligated to pay your credit card debts and they are not necessary for you to live (food, shelter, etc.). So, the IRS doesn’t usually allow you to pay your credit card bills if you have a large tax debt. The government believes it’s much more worthy of your dollar than a credit card company.
Next, you need to compare your expenses to the allowed standards listed on IRS.gov. Search for “Collection Standards” and “allowed expenses.” Those are based on your State and County and are updated each month. You will see a very big difference in allowed expenses in different states. For example, you may be allowed $2,000 more each month in Los Angeles compared to some regions of Texas.
If your actual expenses are near your allowed expenses, that’s great. You’re ready for the first skirmish with the IRS. If your expenses are much higher, you need to get to a financial boot camp and get them in shape.
Note that it’s possible some of your expenses are too low, as well as other being too high. For example, if you have no automobile payment, you might want to get one. But a car on credit, with a payment up to the allowed amount. If not, this cash will go to the IRS.
When you are ready, you should put your expenses into the following categories (IRS Form 433-A, pg. 676).
- Food, clothing, and miscellaneous
- Housing and utilities
- Court ordered payments
- Child/dependent care
- Life insurance
- Other secured debt
- Other expenses
If your expenses don’t fit into these categories or are well over your allowed standards, you should seek professional help. For example, you may be allowed up to 12 months to get your expenses in shape before significant payments are due.
I hope that this ongoing into battle with the IRS and IRS Form 433-A has been helpful. You will find a number of similar articles on this site.