The short version
- IRS financial analysis generally counts all household income, including income that is exempt from tax, such as VA disability.
- Allowable expenses are measured against the IRS Collection Financial Standards, not your actual spending.
- Retired pay, VA compensation, a spouse's income and housing allowances all belong on the form.
- An accurate statement wins more cases than a minimized one. Inflated expenses or missing assets can sink an otherwise good resolution.
Every serious IRS resolution, whether an installment agreement, hardship status or an offer in compromise, runs through a financial statement. For individuals that usually means Form 433-F or the longer Form 433-A (or the Form 433-A (OIC) version used for offers). Veterans and military families make the same mistakes on these forms over and over. Here is how the IRS actually reads your numbers.
Rule one: tax-free does not mean invisible
IRM 5.15.1, the IRS's financial analysis handbook, states that "generally all household income, including income that is exempt from tax on the Form 1040, will be used to determine the taxpayer's ability to pay." VA disability compensation is not taxable. It is still income for collection purposes. So is combat pay excluded under IRC 112, and so are nontaxable allowances.
Veterans often leave VA compensation off the form because it is not on their tax return. That is a mistake. The IRS can see benefit income through other sources, and an omission undercuts your credibility. Treas. Reg. 301.6343-1(b)(4)(iii) lists failing to make full disclosure of assets and inflating expenses as examples of failure to act in good faith.
The levy exemption for VA disability is a different question. The IRS cannot seize it, but it can count it. See VA disability and IRS levies.
What goes in the income section
IRM 5.15.1 describes income categories the IRS uses, including:
- Wages, which the manual defines to include salary, tips, meal allowance, parking allowance or any other compensation for services, for both the taxpayer and spouse.
- Pensions, which include Social Security and retirement plan income. Military retired pay and OPM annuities belong here.
- Other income, a catch-all. VA disability compensation, CRSC and similar payments are reported as income even though they are not taxable.
- Rental income, self-employment income, interest, dividends, child support and alimony as applicable.
For active duty families, basic pay, BAH and BAS all reflect money available to the household. The manual's wage definition covers allowances, so expect the IRS to count them. On the expense side, your housing cost is then measured against the standards (below).
A non-liable spouse's income raises its own issue. The IRM's shared expense rules (IRM 5.15.1.5) generally allocate household expenses in proportion to each person's share of income rather than charging the liable spouse with the other spouse's paycheck directly. This is technical. Get it right, because it can swing the result.
Expenses: standards, not wishes
The IRS does not simply accept what you spend. IRM 5.15.1 explains the Allowable Living Expense standards, also called the Collection Financial Standards:
- National standards for food, clothing, housekeeping supplies, personal care and miscellaneous, plus out-of-pocket health care. These are allowed without proof up to the standard.
- Local standards for housing and utilities (by county) and transportation (ownership and operating costs by region).
- Other necessary expenses such as taxes, health insurance, court-ordered payments, child care and certain life insurance, when necessary and substantiated.
The standards change periodically. The IRS publishes current tables on irs.gov. Use the tables in effect when you submit.
The IRS does not ask what you spend. It asks what it will allow. Learn the difference before you fill out the form.
Deviations: when the standards are not enough
Veterans with service-connected conditions often have real costs above the standards: medical travel, adaptive equipment, higher utility bills from medical devices, specialized care. The IRM allows deviation from the standards when a taxpayer substantiates that an amount is necessary. Document it. A one-line note saying "medical" will not do it. Bills, prescriptions, provider letters and mileage logs will.
Assets
Forms 433-A and 433-F ask about bank accounts, investments, retirement accounts, real estate and vehicles. Things veterans and federal retirees often forget:
- The TSP. It is an asset. Whether the IRS can or should reach it is another matter. See IRS levies on TSP accounts.
- VA life insurance cash value. IRM 5.11.6 notes the cash loan value of VA insurance policies can be levied.
- Vehicles titled in your name but driven by someone else.
- A separate account used for VA deposits. List it.
Which form, which outcome
| Goal | Usual form | What the IRS is deciding |
|---|---|---|
| Installment agreement above streamlined limits | Form 433-F or 433-A | The monthly payment you can afford |
| Currently Not Collectible | Form 433-F or 433-A | Whether you can pay basic living expenses and anything more |
| Offer in compromise | Form 433-A (OIC) or 433-B (OIC) | Reasonable collection potential from income and assets |
Mistakes that cost veterans the most
- Listing the mortgage or rent actually paid without noticing the county housing standard is lower, then being surprised by a higher payment demand.
- Forgetting a second vehicle, a boat or a paid-off truck that has equity.
- Omitting a spouse's income entirely, which invites the IRS to compute the shared expense split on its own.
- Claiming voluntary retirement contributions as an expense. IRM 5.15.1 says contributions to voluntary retirement plans are not a necessary expense.
Practical tips
- Use three months of bank statements and pay records to compute average monthly income. The IRS will.
- Match every income line to a document: LES, retiree account statement, VA award letter, OPM annuity statement.
- Report net, not gross, only where the form asks for it. Most forms want gross income with taxes listed as an expense.
- Claim every allowable expense category. People forget current-year tax payments, health insurance and court-ordered payments.
- Keep copies of what you sent.
Next steps depend on the result. If your numbers show no ability to pay, read Currently Not Collectible for veterans. If they show some, read installment agreements. If the balance is far beyond what you could ever pay, read offers in compromise for veterans.
Frequently asked questions
Do I have to list VA disability on Form 433-A?
Yes. IRM 5.15.1 says the IRS generally uses all household income, including income exempt from tax, to determine ability to pay. Leaving it off can be treated as a failure to make full disclosure.
Can the IRS take my VA disability if it counts it as income?
Counting and taking are different. VA service-connected disability is exempt from IRS levy under IRC 6334(a)(10), but it still factors into what the IRS thinks you can pay from other sources.
Does BAH count as income for the IRS?
The IRM wage definition includes allowances and other compensation for services, so expect housing and subsistence allowances to be counted as household income. Your housing costs are then measured against the local standards.
What if my medical expenses are higher than the IRS standard?
The IRS allows deviations when you substantiate that the expense is necessary. Provide bills, prescriptions and provider documentation.
Is my spouse's income counted?
It is considered. The IRS shared expense rules generally allocate household expenses by each person's share of income. The details matter, so prepare that section carefully.