Reasonable collection potential: Form 433-A (OIC) worked through

Section 3: the equity lines, one asset at a time

The form wants the most recent statement for every account, including stored value cards, digital assets, foreign accounts and the cash value of life insurance. Each line ends in a whole-dollar figure that can never be negative: if a loan exceeds the quick-sale value, the line is zero, and the shortfall does not reduce another line. The family in this example owns a house with a large mortgage, one financed car, a 401(k), a checking account and ordinary household goods.

The house is worth $340,000, but 80 % of that is $272,000, less than the mortgage, so line (5) is zero. The retirement account, untouchable in the family's eyes, supplies most of Box A. The form adds a note here: the reduction from market value may be larger than 20 % because of the tax and early withdrawal penalty on a distribution, and the IRS adjusts it case by case. The car keeps $8,600 of quick-sale equity, of which $3,450 is ignored. A self-employed person repeats the exercise for business assets in Box B, with an allowance for tools of the trade.

The allowances are not automatic. The Form 656 booklet says the bank and car exclusions apply only to individuals, and only once the IRS has found that the debt cannot be paid in full from equity, a plan, or both. The form repeats it: the 12 and 24 multipliers and those allowances do not apply if the IRS concludes the debt can be paid in full within the legal collection period.

Arizona adds a wrinkle the form asks about in Section 1. It is one of nine community property states listed on Form 433-A (OIC), with California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington and Wisconsin, and a taxpayer who was married and lived in one of them in the last ten years ticks a box. Real property owned by a spouse in a community property state belongs on the equity lines even when the offer is filed by one spouse alone.

Section 7: Box D minus Box E

Box D is every source of household income before tax, including Social Security, pensions, rent, child support received and gig work paid through an app. Box E is the expense side. On lines 39 (food, clothing and miscellaneous) and 45 (out-of-pocket health care) the form asks for the full national standard even if the household spends less. On the housing and vehicle lines the IRS allows the lesser of the amount paid and the local standard. Insurance premiums, child care and current taxes are taken as paid.

Two of the family's real costs fall away. The housing payment of $2,950 is capped at the county figure, and the car's running costs are capped at the metro figure. Each capped dollar adds a dollar to Box F, which is then multiplied. The booklet also lists what the IRS generally does not count at all: private school tuition, college costs, charitable gifts and payments on unsecured debt such as credit cards beyond what the miscellaneous allowance covers.

Section 8: from boxes to an offer

The family owes $74,000. A lump-sum offer of $58,710 is under that, so an offer is arithmetically possible; the periodic version at $73,050 still sits below the balance. Raising Box F by $100 a month raises the lump-sum minimum by $1,200 and the periodic one by $2,400: income is where a small error is most expensive.

Offering less than the formula

The form allows it in one situation. If special circumstances, such as a serious illness or a dependent's care, mean the household cannot pay the computed amount, you enter what you can pay on Form 656, Section 4, and explain the circumstances in Section 3 with documents. The IRS then decides whether to accept a lower figure. It also verifies every number against pay stubs, three months of bank statements, loan statements and its own records, and may raise a value it thinks is understated. The arithmetic here follows the published form; the IRS's own valuation of your case, and its decision, can differ, and this page is not tax advice.