Form 433-A Section 9: Monthly Income and Expenses
Provide detailed information about total monthly income and expenses in Section 9, lines 24 through 45. The monthly budget, along with the Form 433-A Worksheet and ample documentation, are the crucial elements in your Offer in Compromise application. In fact, your budget in Section 9 and the reasonable collection potential calculated on the Worksheet work hand-in-hand to provide the IRS with information to determine how much money they can collect for back taxes.I always prepare three budgets, each using different criteria. It is important to see what each budget represents, and how it fits in with your overall Offer in Compromise application. I prepare all Offer in Compromise budgets using a spreadsheet template that mirrors the categories of information requested in Section 9 of Form 433A.
Budget #1 – Actual Income and Expenses. This represents your total income and total expenses for a month. Here's where tracking your expenses using Quicken, Quickbooks, or a spreadsheet, will come in handy. I typically take the average of the past three months of income and expenses and report them in the appropriate categories in Section 9. This provides the taxpayer with a good overview of their actual financial situation. The crucial piece of information you are looking for is the difference between Total Income (Line 34) and Total Living Expenses (Line 45). If you have a positive number, then the taxpayer has disposable income for the month. I would use that disposable income figure to find out if the taxpayer could qualify for a monthly installment agreement.
Budget #2 – Income and Expenses using some IRS limits. The IRS generally will disallow any expense that is not directly related to the health, welfare, and sustenance of an individual and his or her family. So, for example, expenses for cable television, private school, and credit card payments will not be considered in the taxpayer's allowable budget. The items actually included in the monthly budget are listed in the footnotes and instructions for Lines 35 through 44. This budget is the starting point for figuring out how much "extra expenses" in comparison to Budget #3 we need to negotiate for.
Allowable expenses include:
- Food, clothing, housekeeping supplies, and personal care products (reported on Line 35),
- Rent, mortgage payment, property taxes, renter's insurance, homeowner's insurance, HOA dues, electric and gas utilities, telephone utilities, water, fuel oil, and trash collection (reported on Line 36),
- Car loan payments, lease payments, auto insurance, registration and license fees, maintenance, repair, gasoline, parking, tolls, or bus fare (reported on Line 37),
- Health insurance premiums, co-payments for doctors and medicines, hospitalization, and other medical and health care expenses (reported on Line 38),
- Taxes for federal income tax withholding, Social Security and Medicare payroll taxes, estimated tax payments, state income tax withholding, local income tax withholding (reported on Line 39),
- Child support, alimony, and other court-ordered payments (reported on Line 40),
- Life insurance premiums (reported on Line 42),
- Other secured debt, such as loans secured by a 401k or certificate of deposit (reported on Line 43), and
- Other expenses necessary for the health, welfare, and sustenance of the taxpayer. Detail any unusual but necessary expenses. A good example would be annual fees paid to renew an occupational license. Unless an expense is directly related to a person's job, career, or sustenance, it is unlikely that the IRS will allow the expense. (Reported on Line 44.)
