The right of the IRS to pursue collection of a tax liability depends upon the existence of a valid assessment. An assessment can arise in the following ways: (1) through the voluntary self-assessment of a liability by the filing of a tax return; (2) by the taxpayer’s consent to the assessment of a deficiency arising from an examination; (3) from the taxpayer’s failure to file
The IRS does not want to be the taxpayer’s bank or finance company. When the taxpayer demonstrates his inability to pay the liability in full, but it appears that the liability can be paid in full over a period of time, the IRS will likely consider a deferred payment arrangement commonly referred to as an Installment Agreement.
Before the IRS is willing to consider either an Installment Agreement or an Offer in Compromise, it must be satisfied of the taxpayer’s financial condition warrants relief and will require the filing of a Collection Information Statement. Form 433-A is a Collection Information Statement used for individuals and Form 433-B is a Collection Information Statement used for businesses and for individuals with sole proprietorships or other closely held entities. These forms are designed to disclose the taxpayer’s "ability to pay."
If the taxpayer has equity in his assets, the IRS might insist, as a condition of any agreement, that the taxpayer either liquidate assets or borrow the equity out of the assets in satisfaction of his tax liability. Similarly, if the taxpayer’s net monthly cash flow exceeds his necessary living expenses, the IRS will generally insist that such excess be applied against his liability.