IRS Publication 433-A: The Collection Information Statement
IRS Publication 433-A is the official guide to the most important document in any IRS collection case — Form 433-A, the Collection Information Statement. This form is your complete financial disclosure to the IRS: every asset, every source of income, every monthly expense. It determines whether your Offer in Compromise is accepted, whether you qualify for an installment agreement, and whether the IRS places you in currently-not-collectible status. Accuracy is everything — one mistake can cost you thousands.
Assets — What You Must Disclose on Form 433-A
Publication 433-A requires you to list every asset you own, its fair market value (FMV), and any encumbrances against it. The IRS defines assets broadly — if you own it or have an interest in it, it goes on the form. The net realizable equity (quick-sale value minus loans) in your assets is a direct input into the RCP formula.
BANK ACCOUNTS: Every checking, savings, money market, and certificate of deposit account. You must provide the financial institution name, account number, and current balance for each account, including joint accounts. The IRS will request bank statements for the last 3-6 months to verify the balances and identify any transfers or unusual activity.
INVESTMENTS: Stocks, bonds, mutual funds, ETFs, cryptocurrency, and any other securities. You must list the number of shares/units and current market value. Retirement accounts (401(k), IRA, pension) are listed separately — the IRS distinguishes between retirement accounts (which may have protected status) and taxable brokerage accounts (which are fully countable as assets).
REAL ESTATE: Your primary residence, vacation homes, rental properties, undeveloped land, and timeshares. For each property, list the address, fair market value, loan balance, monthly payment, and lender. The quick-sale value (typically 80% of FMV) is used to calculate equity. Your primary residence may qualify for an equity reduction under certain circumstances.
VEHICLES: Cars, trucks, motorcycles, boats, RVs, and any other titled vehicles. For each, list the year, make, model, mileage, FMV (typically from Kelley Blue Book or NADA), loan balance, and monthly payment. The quick-sale value (80% of FMV) minus the loan balance equals net equity. Leased vehicles are listed as expenses, not assets.
LIFE INSURANCE: Whole life and universal life policies only — term life has no cash value and is not listed as an asset. For whole/universal life policies, list the cash surrender value (not the death benefit). The IRS counts the cash value you could access by surrendering the policy or taking a loan against it.
BUSINESS ASSETS: If you are self-employed, you must disclose all business assets: accounts receivable, inventory, equipment, tools, and the business bank account(s). The equity in business assets counts toward RCP. This is a critical area for self-employed taxpayers — undervaluation or omission of business assets is a common source of OIC rejection and potential fraud referrals.
Income Calculation — Every Dollar Counts
Publication 433-A requires you to disclose all sources of gross monthly income. The IRS compares what you report against third-party data (W-2s, 1099s, bank deposits, and IRS internal records). Discrepancies trigger audits and can result in OIC rejection or even criminal referral.
Wage Income
Report gross monthly wages from all employers. Provide the last 3 months of pay stubs for each job. The IRS uses gross pay, not net — pre-tax deductions (401(k) contributions, health insurance premiums) may be treated differently depending on whether they are voluntary or mandatory. Overtime, bonuses, and commissions must be averaged over the look-back period (typically 3-12 months).
Self-Employment Income
For sole proprietors, independent contractors, and gig workers: report gross monthly business receipts, not net profit. You must provide a profit and loss statement for the last 3-6 months and the prior year's Schedule C. The IRS allows deduction of ordinary and necessary business expenses, but personal expenses run through the business will be disallowed and added back to income.
Rental Income
Report gross monthly rental receipts from all rental properties. The IRS allows deduction of mortgage interest, property taxes, insurance, repairs, and depreciation. Net rental income (or loss) is included in the total monthly income calculation. Be prepared to provide Schedule E, lease agreements, and a schedule of expenses.
Other Income Sources
Report all other income: alimony received, child support received (not counted for RCP in most cases but must be disclosed), Social Security benefits, unemployment compensation, pension/retirement distributions, disability payments, interest and dividends, and any other recurring or one-time receipts. The IRS cross-references these against information returns (1099-R, SSA-1099, 1099-INT, 1099-DIV).
IRS Collection Financial Standards — Allowable Living Expenses
The IRS does not accept whatever you claim as monthly expenses. Instead, Publication 433-A applies the IRS Collection Financial Standards — a set of predetermined allowable expense amounts that limit what the IRS considers "necessary." Expenses above these standards require documented proof of necessity and are rarely approved.
NATIONAL STANDARDS — FOOD, CLOTHING & MISCELLANEOUS: Fixed monthly allowances based on household size and gross monthly income. For a family of four with gross monthly income of $8,334-$12,500, the 2026 national standard is approximately $1,650-$1,950 per month for food, housekeeping supplies, apparel, personal care, and miscellaneous. The IRS does not require receipts for these categories — the standard amount is allowed by default. No additional amount is permitted except in documented hardship cases.
LOCAL STANDARDS — HOUSING & UTILITIES: Allowable housing costs vary by county. The standard includes rent/mortgage payment, property taxes, homeowners/renters insurance, electricity, gas, water, sewer, and trash. For Los Angeles County, the 2026 standard for a family of four is approximately $2,800-$3,200 per month. If your actual housing costs exceed the local standard, you must document why the excess is necessary — the IRS rarely approves housing expenses above the standard absent a medical necessity or court order.
LOCAL STANDARDS — TRANSPORTATION: Two components: ownership costs and operating costs. Ownership costs cover a loan or lease payment up to the standard amount (approximately $629 per vehicle in 2026). Operating costs cover fuel, maintenance, insurance, and registration (approximately $310 per vehicle). The IRS allows one vehicle per taxpayer (two per married couple). Additional vehicles require documentation of necessity (e.g., work vehicle, vehicle for a disabled dependent). Public transportation costs are allowed in lieu of vehicle ownership.
OTHER NECESSARY EXPENSES: These are expenses the IRS considers necessary for health and welfare or the production of income. They include: health insurance premiums, out-of-pocket medical expenses exceeding the standard, court-ordered payments (child support, alimony, spousal support), child care and dependent care costs necessary for employment, life insurance premiums (term policies only — whole life premiums are considered an investment), secured debt payments on assets you are retaining, delinquent state and local taxes, and certain federal tax payments. Each requires documentation.
CONDITIONAL EXPENSES: The IRS may allow certain expenses that do not fit the standard categories if you can prove they are necessary for health and welfare or the production of income. Examples include: private school tuition for a child with special needs, extraordinary medical expenses not covered by insurance, union dues required for employment, and professional license fees necessary to maintain employment. These are reviewed on a case-by-case basis and require comprehensive documentation.
Reasonable Collection Potential (RCP) — The Formula That Decides Everything
The RCP formula is the mathematical engine that drives every IRS collection decision. It answers a simple question: "If we liquidated everything you own and took every dollar of your disposable income, how much could we collect?" Your Offer in Compromise lives or dies on this number.
Component 1: Net Realizable Equity in Assets
Net realizable equity = (quick-sale value of all assets) - (encumbrances). Quick-sale value is typically 80% of FMV — reflecting what the IRS could actually recover at a forced sale. This includes equity in real estate, vehicles, bank accounts, investments, business assets, and cash-value life insurance. Example: $400K home FMV x 80% = $320K quick-sale value, minus $280K mortgage = $40K equity. That $40K is counted in RCP.
Component 2: Future Disposable Income
Monthly disposable income = (total monthly income) - (allowable monthly expenses per Collection Financial Standards). Multiply by the remaining statutory collection period: 12 months for a lump-sum cash OIC, or 24 months for a periodic-payment OIC. Example: $600/month disposable income x 12 = $7,200 toward RCP for a cash offer.
The RCP Formula
RCP = (net realizable equity) + (monthly disposable income x 12 or 24 months). The IRS will accept an OIC only if the offer amount equals or exceeds RCP. Example: $40K equity + ($600 x 12 = $7,200) = $47,200 RCP. If your OIC offers $25,000, it will be rejected — the IRS believes it can collect $47,200. Understanding this formula is why Publication 433-A guidance is essential: every asset valuation, every income number, and every expense category directly affects RCP.
Doubt as to Collectibility vs. Effective Tax Administration
Most OICs are filed under Doubt as to Collectibility (DATC) — the taxpayer cannot pay the full liability. The RCP formula applies. Effective Tax Administration (ETA) OICs are for cases where collection would create economic hardship or be unfair — RCP may be adjusted. ETA is rare and requires exceptional circumstances (serious illness, advanced age, dependents with special needs). Publication 433-A documentation is required for both DATC and ETA.
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