01
Purpose of the lesson and the central teaching message
By the end of the lesson, participants should be able to: explain what the IRS National Standards are; distinguish National Standards from Local Standards; calculate the current food, clothing, miscellaneous, and health-care allowances; understand why an ordinary household budget may differ from the IRS's calculation; and prepare the records needed for a payment arrangement, Offer in Compromise, or hardship request. The central teaching message is simple: the IRS uses Collection Financial Standards to determine how much income is needed for a household's health and welfare and for producing income, and the difference between monthly income and allowable expenses may be treated as money available toward delinquent federal taxes.
02
When the standards matter
The standards most commonly affect a taxpayer when the IRS requires a Collection Information Statement — Form 433-A, Form 433-F, or Form 433-A(OIC). That happens when the IRS is evaluating a payment plan that requires detailed financial analysis, an Offer in Compromise, a partial-payment installment agreement, a request to temporarily delay collection because payment would create hardship, or a request to release or avoid a collection action based on financial hardship. Not every IRS payment plan requires a complete financial analysis: guaranteed and simplified installment agreements may be approved without applying all the standards. When a taxpayer does not qualify for one of those, the IRS may require a complete CIS and verification of income and expenses.
03
The four major expense groups
There are four major expense groups. National Standard — food, clothing, and other items: the household generally receives the full standard for its family size, even when actual spending is lower. National Standard — out-of-pocket health care: a monthly amount is allowed for each qualifying person, based on age, and is separate from health-insurance premiums. Local Standard — housing and utilities: the IRS normally allows the actual expense or the applicable local maximum, whichever is lower. Local Standard — transportation: vehicle ownership and operating costs are normally limited by applicable standards and actual expenses. The food, clothing, and miscellaneous standard covers five bundled categories — food, housekeeping supplies, apparel and services, personal-care products and services, and miscellaneous — and the IRS normally applies the combined total rather than requiring each subamount to stand alone. National Standards may be beneficial when a household spends less than the standard because the full standard is allowed; Local Standards work differently because housing and transportation are usually limited to the amount actually paid or the standard, whichever is less.
04
Current 2026 National Standards — food, clothing, and other items
Monthly household amounts effective June 29, 2026: 1 person — $867; 2 people — $1,558; 3 people — $1,857; 4 people — $2,176. For each additional person over four, add $397. Formula for larger households: $2,176 + ($397 × number of people over four). These totals include food, housekeeping supplies, apparel and services, personal care, and miscellaneous expenses.
05
Current 2026 National Standards — out-of-pocket health care and household-size rule
Monthly out-of-pocket health-care amount per person: under age 65 — $90; age 65 or older — $163. Formula: ($90 × people under 65) + ($163 × people age 65 or older). This allowance covers medical services, prescription drugs, and medical supplies, and is allowed in addition to health-insurance premiums; elective or purely cosmetic procedures generally do not qualify. Household-size rule: family size generally follows the taxpayer, spouse (where applicable), and dependents shown on the current or most recent return. Reasonable exceptions may apply — for example, certain foster children or pending adoptions — but exceptions should be explained and documented.
06
Prepare two budgets — when the standards help and when they hurt
Every taxpayer going through a detailed collection analysis should prepare two budgets: an actual household budget (where the cash really goes) and an IRS allowable-expense budget (what the IRS may recognize when calculating ability to pay). When the standards help: a two-person household under 65 receives $1,558 + ($90 × 2) = $1,738 for these National Standard categories; if actual spending is $1,250 + $60 = $1,310, the IRS may still allow $1,738 — a $428 benefit over actual spending. The Form 433-A(OIC) instructions specifically tell taxpayers to enter the full allowable standard for these categories even when actual spending is lower. When the standards hurt: if the same household actually spends $2,100 + $250 = $2,350, the normal National Standard is still $1,738 — as much as $612 of real spending may not reduce IRS-calculated ability to pay unless the excess is necessary, reasonable, and documented (for example, a medically required diet). The miscellaneous portion does not receive a separate upward deviation; health-care expenses above the standard can be considered when necessary and documented.
07
Full financial-preparation example — a two-person household
Two-person household (both under 65), $8,000 gross monthly income. Local housing and transportation figures below are hypothetical; actual limits depend on location and vehicle situation. Current federal/state/payroll taxes: actual $1,200 / allowed $1,200. Housing and utilities: actual $2,400 / allowed $2,000 local limit. Transportation: actual $1,100 / allowed $900 local limit. Food, clothing, and other items: actual $2,100 / allowed $1,558 National Standard. Out-of-pocket health care: actual $250 / allowed $180 National Standard. Health-insurance premiums: $500 / $500. Necessary, documented child care: $700 / $700. Totals: actual $8,250 / allowed $7,038. Actual household result: $8,000 − $8,250 = −$250 (a $250 monthly deficit in real life). IRS calculation: $8,000 − $7,038 = $962 of remaining monthly income. Teaching point: this does not automatically mean the household must pay $962 — a deviation, a different treatment of household income, special circumstances, or another collection alternative may apply — but it demonstrates why taxpayers should calculate their situation under IRS rules before proposing a payment or submitting an OIC.
08
Effect on different tax-resolution options
Financially analyzed payment plan: Form 433-A lists gross monthly income, total living expenses, IRS-allowable expenses, and a net difference — in cases requiring full analysis, that net amount influences the proposed installment payment. Offer in Compromise on Form 433-A(OIC): household income is totaled, allowable household expenses are subtracted, and the result becomes 'Remaining Monthly Income,' which is multiplied by 12 for certain shorter-payment offers or by 24 for certain periodic-payment offers and added to available asset equity when calculating a preliminary minimum offer. A difference of only $100 per month in allowable expenses can change the future-income portion of a preliminary offer by $1,200 (12-month multiplier) or $2,400 (24-month multiplier) — which is why documenting necessary expenses matters. Currently Not Collectible hardship status: when allowable expenses consume available income, the analysis may support a temporary delay in active collection, but CNC does not erase the debt — penalties and interest generally continue, refunds may be applied, and the IRS may review the person's finances again later.
09
Step-by-step preparation process
Step 1 — Identify the applicable form and collection option (general CIS, payment arrangement, OIC, or CNC/hardship). Form 433-A and Form 433-A(OIC) are not interchangeable. Step 2 — Start with gross monthly income, not take-home pay. Form 433-A instructs wage earners to report gross wages before withholding, insurance, retirement, credit-union transfers, or loan payments; current federal/state/payroll taxes are then entered as an expense. Include wages, Social Security and pensions, net self-employment income, net rental income, interest/dividends/distributions, child support or alimony received, recurring gig or digital-platform income, and applicable nontaxable household income and contributions from other household members (as the OIC form directs). Step 3 — Establish household size and ages, including taxpayer, spouse, dependents, each person's age, and whether another adult contributes to household expenses. Non-liable spouses, partners, roommates, and adult children require special care; community-property rules can make the analysis more complex. Step 4 — Apply the full National Standards; enter the complete food, clothing, and other-items standard for the eligible family size (do not reduce it because actual spending is lower) and calculate the health-care allowance by age, keeping health-insurance premiums separate. Step 5 — Look up Local Standards (housing and utilities by state, county, and family size; transportation for ownership/lease, operating costs, and public transit), limited to actual or standard, whichever is less. Step 6 — Add other necessary expenses (current taxes, necessary child/dependent care, court-ordered support actually paid, certain term-life-insurance premiums, required employment expenses, certain secured debts, and necessary education for employment or a special-needs child) — fact-specific, reasonable, and documented. Step 7 — Average irregular amounts (annualize insurance, seasonal or sporadic income, etc.). Step 8 — Calculate the IRS budget: gross monthly income − IRS-allowable expenses = remaining monthly income. A negative result is not proof any particular resolution will be accepted; assets, equity, filing compliance, future income, and individual circumstances are also reviewed.
10
Documentation checklist and expenses learners should not assume will be allowed
Documentation to gather: Income — pay statements, benefit statements, pension records, self-employment records, profit-and-loss statements. Banking and assets — bank statements, investment and retirement statements, digital-asset records, loan balances. Housing — lease, mortgage statement, property-tax bill, insurance, utilities, association fees. Transportation — loan/lease statement, insurance, fuel, maintenance, registration, tolls, parking. Health — insurance premiums, prescriptions, provider bills, medical supplies, letters about ongoing conditions. Dependents and support — child-care invoices, court orders, proof of support payments, dependency information. Taxes — pay-stub withholding, estimated payments, state/local payment agreements. Special circumstances — physician letters, disability records, employment requirements, caregiving documentation. Form 433-A warns the IRS may request verification of assets, income, encumbrances, and expenses; the OIC form contains an additional submission checklist and documentation supporting special circumstances. Commonly problematic expenses (generally not allowed unless proven necessary for health, welfare, or production of income): private-school or college tuition, charitable contributions, voluntary retirement contributions, general unsecured-debt payments, credit-card payments claimed separately from the purchases they financed, personal expenses already deducted as business expenses, and housing/vehicle/lifestyle expenses substantially above the standards without a necessity explanation. Credit cards are generally treated as a payment method; the miscellaneous allowance is intended to cover items such as credit-card payments and bank fees. Standards are not always absolute caps — a necessary and substantiated deviation may be allowed when the standard is inadequate, and in certain installment-agreement cases the IRS's six-year rule may permit expenses above the normal standards and certain minimum debt payments when the entire liability can be paid within six years (that exception should not be assumed for an OIC).
11
Ten-minute classroom exercise and 45-minute lesson plan
Exercise — household of five (four under 65, one age 68). Food, clothing and other items: four-person allowance $2,176 + one additional person $397 = $2,573/month. Out-of-pocket health care: (4 × $90) + (1 × $163) = $360 + $163 = $523/month. Total National Standard allowances: $2,573 + $523 = $3,096/month, plus eligible health-insurance premiums. Discussion — what still requires a local lookup? Housing and utilities, vehicle operating costs, and related transportation limits. Suggested 45-minute lesson: 5 min — explain that an actual budget and an IRS budget are different; 10 min — define National Standards, Local Standards, and other necessary expenses; 10 min — review the 2026 tables and household-size calculation; 10 min — work through the full two-person example; 5 min — complete the five-person exercise; 5 min — review documentation and common mistakes. Closing statement: 'Prepare your real budget first. Then convert it into an IRS allowable-expense budget. Where the two budgets differ, collect records explaining why the actual expense is necessary.' This material is educational and does not replace advice from an enrolled agent, CPA, or tax attorney familiar with the person's complete financial and collection situation.
