- This chapter provides instructions for analyzing the taxpayer's financial condition to determine reasonable collection potential (RCP). IRM 5.15, Financial Analysis Handbook, provides information on analyzing and verifying of financial information and should be used in conjunction with this section.
- The ability to pay determination should be made on the liability(s) due at the time the offer was submitted.
- The initial calculation should be completed to determine if the taxpayer can full pay through installment agreement guidelines, based on submitted substantiation (absent special circumstances or effective tax administration criteria), including application of the standards and allowances. It is appropriate to use Decision Point (AOIC) or Decision IA (IRWeb or SERP) to ensure accruals are taken into consideration.
- If the initial calculation indicates the taxpayer cannot full pay through an installment agreement, continue the investigation to determine the RCP.
- Document the history supporting your determination.
- Collection Information Statements (CIS) and related documentation submitted with an OIC should reflect information no older than the prior six months from the date of the OIC submission.
- If during the investigation, the financial information becomes older than 12 months and it appears significant changes have occurred, a request for updated information may be appropriate. Prior to contacting the taxpayer, attempt to secure the necessary verification through internal sources. If taxpayer contact is required, contact via telephone is preferred to expedite case processing.
- In certain situations, information may become outdated due to significant processing delays caused by the Service and through no fault of the taxpayer. In those cases, it may be appropriate to rely on the outdated information if there is no indication the taxpayer's overall situation has significantly changed. Judgment should be exercised to determine whether, and to what extent, updated information is necessary. If there is any reason to believe the taxpayer's situation may have significantly changed, secure a new CIS.
- A thorough verification of the taxpayer's CIS, Form 433-A and/or Form 433-B, involves reviewing taxpayer submitted documentation and information available from internal sources. As a general rule, additional documentation should not be requested when the information is readily available from internal sources or it would not change the recommendation.
- Collection issues that have been previously addressed during a prior investigation will not be re-examined unless there is convincing evidence that such reinvestigation is absolutely necessary. Investigative actions that are less than 12 months old may be used to evaluate the OIC, unless the taxpayer indicates there has been a material change or there is evidence indicating his financial situation has changed in the intervening months.
Example:If a Revenue Officer has completed a full CIS analysis, including verification of assets, income, and expenses, and has made a determination of the fair market value (FMV) of assets, equity in assets and monthly ability to pay, this information should not be reinvestigated. The OE or OS should use the ROs determinations to calculate the RCP. However, any differences between the taxpayer's and the ROs CIS should be resolved by contacting and inquiring with the taxpayer, by phone if possible.
- Prior to accepting an offer, if the case file does not provide documentation to indicate the source of the offer amount, it may be necessary to contact the taxpayer to determine the source of the offer funds.
- Verify as much of the CIS as possible through internal sources.
- The following internal and external information sources should be considered. Discuss any major discrepancies with the taxpayer/POA and document the history. This list is not all inclusive.
Internal Sources Review to ENMOD and INOLES Identify/research cross reference TINs for related business activity not declared on the CIS. SUMRY, IMFOL and BMFOL Verify full compliance and determine if there are any open control bases or freeze codes. RTVUE (IMF)/ BRTVUE (BMF), TRDBV, or TDS Compare the amount of reported income declared on the CIS. IRPTRO
- Compare real estate tax and mortgage interest deductions to the amounts declared on the CIS. Discuss any difference with the taxpayer to determine the reason for the increase or decrease.
- Identify accounts not reported on the CIS, such as certificates of deposit or investment accounts.
- Verify sources of income, such as employers, bank accounts, and retirement accounts.
- Identify recent transferred or disposed of assets, such as stocks and bonds.
State Motor Vehicle Records Identify motor vehicles currently registered to the taxpayer but not declared on the CIS. Also check for ownership in business names. Real Estate Records
- Identify real property titled to the taxpayer but not declared on the CIS.
- Identify property held by transferee, nominee, or alter ego. Also check for ownership in business names.
Accurint Identify other aliases, related business entities, UCC filings, properties, judgments, and current vehicle registrations. Credit Bureau Report
- Identify past residences and employers.
- Verify competing lien holders, balances due and payment history.
- Identify property not listed on CIS.
- Based on your discretion and judgment, consider securing a full credit report to assist in locating taxpayer assets, verifying financial information, and/or determining an alternative resolution to an OIC. The case history must be documented with the reason(s) for the request.
- A full credit report should be requested prior to accepting an offer when the current balance exceeds $100,000.
- All credit report requests require managerial approval.
- When computing equity in real estate or allowable motor vehicles, and the taxpayer has not submitted substantiation of loan balances claimed on the Form 433-A, OE/OSs should request a credit report and use the loan balance information to determine the current balances of any relevant loans from commercial lenders. If the loan is from a private source, it may be necessary to contact the taxpayer/representative for the information.
- Procedures for destruction of credit reports for OICs should be as follows:
- For rejected cases, all credit reports should be destroyed upon closure of the case after the 45-day period for appeal has passed. If the taxpayer files for appeal, the credit report should remain with the file and forwarded to Appeals. Appeals will then be responsible for pulling and destroying the report. This is in accordance with IRM 18.104.22.168.2.3.2 (Exception).
- For accepted cases, the credit report should be destroyed after all approving signatures have been obtained.
- For all other closures (returned, withdrawn, terminated), all credit reports should be pulled after the managerial review and approval.
- In all cases, where a credit report was secured, the case history must be documented that a credit report was secured and reviewed. The documentation must include a summary of any information relevant to the offer recommendation.
- If not present in the file when assigned for investigation and internal sources are not available or indicate a discrepancy, appropriate documentation should be requested from the taxpayer either verbal or written, to verify the information on the CIS. A request for additional information and verification should be based on the taxpayer’s circumstances and the information must be necessary to make an informed decision on the acceptability of the taxpayer’s OIC. Do not make a blanket request for information that would have no impact on the case resolution. Do not request any information that is available internally.
- The chart below provides guidance to the types of information that may be needed to verify the CIS if not included or addressed with the original Form 656, 433-A, or 433-B. This list is not all inclusive.
Note:Generally, current is defined as 3 months as of the date the Form 656 was signed, not the date the Form 656 was received.
Taxpayer Documentation Review to Wage Earner — wage statements for the prior three months or a statement with current year–to–date figures
- Compare average earnings to the income declared on the CIS.
- Verify adequate tax withholding.
- Identify payroll deductions.
- Identify deductions to savings accounts, credit union accounts, or retirement accounts.
Self-employed – proof of gross income (accounts receivable, commission statements, etc.) for the prior three months for IMF accounts and six months for operating businesses
Note:Seasonal businesses may require up to 12 months of verified income.
Compare average earnings to the income declared on the CIS Bank statements – three current months showing the monthly transactions, withdrawals, and deposits for IMF accounts and six months for operating businesses Compare deposit amounts to income reported on the tax return and CIS. Question deposits that exceed reported income and unusual expenses paid.
Note:Consider requesting specific cancelled checks and deposit items if questionable items cannot be adequately explained. See IRM 22.214.171.124, Cash.
Retirement account statements and brochures, brokerage account statements, securities, or other investments Identify the type (mandatory/voluntary), conditions for borrowing, conditions for withdrawal, and current market value. See IRM 126.96.36.199, Retirement or Profit Sharing Plans. Life insurance policies Identify the cash value of the policy. See IRM 188.8.131.52, Life Insurance. Motor vehicle statements from the lender Verify monthly payment and payoff amount. See IRM 184.108.40.206, Motor Vehicles, Airplanes and Boats. Real estate lender statements Identify the payoff amount and monthly payment expense and verify the property address on the real estate or lender statement. See IRM 220.127.116.11, Real Estate. Court orders and court ordered payments for child support/alimony Verify responsibility for child support/alimony, that the payments are actually being made, and the length of time payments are required to be made.
Note:If a copy of the court order is not provided or the payment cannot be verified, the payment will be disallowed as an expense.
- Proper asset valuation is essential to determine RCP. In some cases, it may be necessary to review the following documents to determine undisclosed assets or income and assist in valuing the property.
- Review divorce decrees or separation agreements to determine the disposition of assets in the property settlements.
- Review homeowners or renters insurance policies and riders to identify high value personal items such as jewelry, antiques, or artwork.
- Review financial statements recently provided to lending institutions or others to identify assets or income that may not have been revealed on the CIS.
- For an on-going business, field calls should be made to validate the existence and value of business assets and inventory. This may require an Other Investigation (OI) to a Collection Field revenue officer. If a field call has been previously made and assets have been valued and documented, a field call would not be required.
- Field calls may be made on non-operating businesses or individuals’ after all internal research has been exhausted. In those cases, a Form 2209 or ICS Other Investigation may be issued. Issuance of other investigations in these instances should be rare.
- Assets should not be eliminated or valued at zero dollars simply because the Service may choose not to take enforcement action against the asset. However, an offer may be accepted for less than RCP when special circumstances are present in accordance with IRM 5.8.11, Effective Tax Administration.
- For offer purposes, assets are valued at net realizable equity (NRE). Net realizable equity is defined as quick sale value (QSV) less amounts owed to secured lien holders with priority over the federal tax lien, if applicable, and levy exemption amounts. See IRM 5.17.2 for more information.
- QSV is defined as an estimate of the price a seller could get for the asset in a situation where financial pressures motivate the owner to sell in a short period of time, usually 90 calendar days or less. Generally, QSV is an amount less than fair market value (FMV) . For purposes of determining the taxpayer's reasonable collection potential (RCP), information provided by the taxpayer and third party sources available to the OE/OS should be reviewed to arrive at an appropriate FMV of the property.If the OE/OS determines the FMV of an asset to be greater than the amount listed by the taxpayer, a discussion with the taxpayer/representative is required to determine if the taxpayer has any additional information to assist in correctly determining the FMV of the asset. If OE/OS cannot reach agreement with the taxpayer on the appropriate value of an asset, a discussion with the manager should be held to determine if any additional resources are available to verify the correct valuations is being used in the calculation of RCP.
- Normally, QSV is calculated at 80% of FMV. A higher or lower percentage may be applied in determining QSV when appropriate, depending on the type of asset and current market conditions. If, based on the current market and area economic conditions, it is believed that the property would quickly sell at full FMV, then it may be appropriate to consider QSV to be the same as FMV. This is occasionally found to be true in real estate markets where real estate is selling quickly at or above the listing price. As long as the value chosen represents a fair estimate of the price a seller could get for the asset in a situation where the asset must be sold quickly (usually 90 calendar days or less) then it would be appropriate to use a percentage other than 80%. Generally, it is the policy of the Service to apply QSV in valuing property for offer purposes.
- When a particular asset has been sold (or a sale is pending) in order to fund the offer, no reduction for QSV should be made. Instead, verify the actual sale price, ensuring that the sale is an arms length transaction, and use that amount as the QSV. A reduction may be made for the costs of the sale and the expected current year tax consequence to arrive at the NRE of the asset. Consider reviewing a lender statement that estimates proposed closing costs.
- When the value of an asset is other than the QSV, document the case history defining the decision and the basis for the value used.
- When taxpayers submit separate offers but have jointly owned assets, allocate equity in the assets equally between the owners. However:
If… Then… The joint owners demonstrate their interest in the property is not equally divided Allocate the equity based on each owner's contribution to the value of the asset. The joint owners have joint and individual tax liabilities included in the offer investigation Apply the equity first to the joint liability and then to the individual liability.
- For property held as tenancies by the entirety when the tax is owed by only one spouse, the taxpayer’s portion is usually 50% of the property’s NRE.
- It may be necessary to review applicable state law, including the effect community property and registered domestic partnership laws have on property ownership rights in order to determine the taxpayers interest in assets that should be included in RCP.
- When investigating the RCP for an offer that includes business assets, an analysis is necessary to determine if certain assets are essential for the production of income. When it has been identified that an asset or a portion of an asset is necessary for the production of income, it may be appropriate to adjust the income or expense calculation for that taxpayer to account for the loss of income stream if the asset was either liquidated or used as collateral to secure a loan to fund the offer.
- When valuing income-producing assets:
If… Then… There is no equity in the assets There is no adjustment necessary to the income stream. There is equity and no available income stream (i.e. profit) produced by those assets There is no adjustment necessary to the income stream. Consider including the equity in the asset in the RCP. There are both equity in assets that are determined to be necessary for the production of income and an available income stream produced by those assets
- Compare the value of the income stream produced by the income producing asset(s) to the equity that is available.
- Determine if an adjustment to income or expenses is appropriate.
An asset used in the production of income will be liquidated to help fund an offer Adjusting the income to account for the loss of the asset. A taxpayer borrows against an asset that is necessary for the production of income, and devotes the proceeds to the payment of the offer Consider the effect that loan will have on future expenses and the future income stream. The taxpayer is either unable or unwilling to secure a loan on the equity in income producing assets
- Compare the equity in the assets with the income produced by those assets.
- Determine if an adjustment to income stream is appropriate to account for the potential loss of the assets.
- These considerations should be fully documented in the case history. For example:
If… Then… A self-employed construction tradesman sells a truck, which he used to haul materials, and devotes the proceeds to the offer Consider allowing the expected cost of delivery services as a business expense. A tradesman borrows against the truck instead of selling it and devotes the proceeds to the offer Consider allowing the loan repayment as a business expense. A loan cannot be secured and loss of the truck would create an economic hardship
- Compare the equity in the assets with the income produced by those assets.
- Determine if an adjustment to income stream is appropriate to account for the potential loss of the assets.
An outside salesman has a luxury car The equity should be included in the RCP. A business owns a vacation property, which is used for annual board meetings. The equity should be included in the RCP. Do not allow any loan repayment.
- A critical part of the financial analysis is to determine what degree of control the taxpayer has over assets and income in the possession of others. This is especially true when the offer will be funded by a third party.
- When these issues arise, apply the principles in IRM 5.17.14, Fraudulent Transfer and Transferees and Other Third Party Liability, or request a Counsel opinion. Document the valuation and reason for including any assets held by a nominee or alter ego, including the identification of any documents which substantiate the determination.
- If the taxpayer has a beneficial interest in the asset or income stream, then the value should be reflected in the RCP. This may require the taxpayer to submit completed financial statements for the entity identified.
- If the taxpayer is unwilling or unable to provide the financial information requested; consider assigning a value based on available information. If information necessary to determine whether the taxpayer’s offer should be accepted is not provided, consider a return as discussed in IRM 18.104.22.168.2.3. The return recommendation should include a thorough discussion on the reasons for returning the taxpayer's offer including the documents requested and why they are necessary to make the offer recommendation.
- Prior to returning an offer because documents relating to the transferee/nominee issue(s) are not submitted, review documents already provided by the taxpayer and consider if the existing information is sufficient to calculate the RCP. If the value of the taxpayer's assets, other than transferred property, is greater than the offer amount, the offer should be recommended for rejection. If a rejection recommendation is made, the taxpayer’s failure to provide requested information and discussion of the transferee/nominee issues should be included in the recommendation narrative.
- If the request for information is a request for verification of possible additional income and the offer has already been determined to be a full pay, proceed with rejection of the offer. If a rejection recommendation is made, the taxpayer’s failure to provide requested information and discussion of the transferee/nominee issues should be included in the recommendation narrative.
- It is not necessary to actually seek or obtain any specific legal remedy in order to address these issues in an offer yet the offer file must be clearly documented with the basis for including the value of a transferred asset in the RCP.
- It is not necessary to actually seek or obtain any specific legal remedy in order to address these issues in an offer. However, care should be taken so that the determination to include assets held by others is reasonable and based on facts substantiated in the file. Document the case decision.
- Determine the taxpayer's interest in bank accounts by ascertaining the manner in which it is held and applying the principles described in IRM 22.214.171.124.4, Bank Accounts. Verify whether deposits in escrow or trust accounts are actually held for the benefit of others.
- Review checking account statements over a reasonable period of time, generally three months for wage earners and six months for in-business taxpayers.
- The checking account would normally be valued at the lowest daily balance during the month. If the lowest balance is not available the ending balance may be used, if it is determined to approximate a reasonable value for the account.
- An individual account may be valued at zero if the monthly ending or lowest daily balance is minimal, income and expenses are approximately equal on the IET, the only deposits into the account are from the taxpayer’s wages/salary or pension, and the taxpayer does not have any other account from which they pay expenses.
- Analyze the statement for any unusual activity, such as deposits in excess of reported income, withdrawals, transfers, or checks for expenses not reflected on the CIS. The OE/OS should question these inconsistencies, as appropriate.
Example:A review of the bank statement shows a beginning balance of $10,000. Discussion with the taxpayer revealed that he maintains a $10,000 monthly balance after allowable living expenses. Include the $10,000 as an asset value on the AET.
- Review savings accounts statements over a reasonable period of time, generally three months.
- If the account has little withdrawal activity, use the ending balance on the latest statement as the asset value for the AET.
- If it is apparent that the account is used for paying monthly living expenses, treat it as a checking account and follow the instructions in paragraphs (1) through (3) above to determine its value.
- If analysis of the bank statement reveals large amounts of recently expended funds, see IRM 126.96.36.199 below for a full discussion of the treatment of dissipated assets.
- If the taxpayer offers the balances of accounts (for example, certificate of deposit, savings bonds, etc.) to fund the offer, allow for any penalty for early withdrawal and the expected current year tax consequence.
- Include any deposits made with the offer as an asset on the AET. Deposits are refundable, and must be considered an asset.
- For funds on deposit with the OIC, allow as an encumbrance any amount borrowed under the provision the monies must be repaid. Appropriate documentation must be provided.
- Do not include any TIPRA payments (lump sum or periodic) as a separate asset on the AET.
- Subtract all TIPRA payments (lump sum or periodic) from the RCP to yield the net remaining offer amount.
- Payments in excess of any required TIPRA payment(s) are treated as a tax payment and will not be included on the AET, unless designated as a deposit by the taxpayer.
Note:The Form 656, Offer in Compromise, allows a taxpayer to treat the excess payment as a deposit in Section IV of the form. Thus, check this section of the form when conducting the analysis.
- Financial securities are considered an asset and their value should be determined and included in the RCP when investigating an offer.
- When the taxpayer will liquidate the investment to fund the offer, allow associated fees in addition to any penalty for early withdrawal and the current year tax consequence.
- To determine the value of publicly traded stock, research a daily paper, other internal sources, or inquire with a broker for the current market price. Then, allow for the estimated costs of the sale to arrive at the QSV.
- To determine the value of closely held stock that is either not traded publicly or for which there is no established market, consider the following methods of valuing the company and assign the applicable portion of the company's value to the taxpayer's stock or other interest:
- Secure and verify a CIS.
- Review recent year’s annual report to stockholders.
- Review recent year’s corporate income tax returns.
- Request an appraisal of the business as a going concern by a qualified and impartial appraiser.
Note:Use business appraisals only when the cost of the appraisal is justified by the complexity of the business activity.
- When a taxpayer holds only a negligible or token interest, has made no investment and exercises no control over the corporate affairs, it is permissible to assign no value to the stock.
Note:When a taxpayer claims they have no interest in a closely held corporation or family owned business, yet the facts reveal their interest may have been transferred or assigned, refer to IRM 188.8.131.52.
- Identify the type, conditions for borrowing or cancellation, and the current loan and cash values.
- Life insurance as an investment (e.g., whole life) is not considered necessary. Reasonable premiums for term life policies may be allowed as a necessary expense. Verify the amount of the premiums and ensure payments are being made.
- When determining the value in a taxpayer's insurance policy, consider:
If… Then… The taxpayer will retain or sell the policy to help fund the offer Equity is the cash surrender value. The taxpayer will borrow on the policy to help fund the offer Equity is the cash loan value less any prior policy loans or automatic premium loans required to keep the contract in force. See IRM 184.108.40.206(2) for allowance of the payment.
- Funds held in a retirement or profit sharing plan are considered an asset and must be valued for offer purposes.
- Contributions to voluntary retirement plans are not a necessary expense. Review of the retirement plan document is generally necessary to determine the taxpayer's benefits and options under the plan.
- When the taxpayer will liquidate the retirement plan to fund the offer, allow any penalty for early withdrawal and the current year tax consequence.
- It may be necessary to secure a copy of the plan to determine the taxpayer’s vested interest and ability to borrow.
- When determining the value of a taxpayer's pension and profit sharing plans consider:
If… And… Then… The account is an Individual Retirement Account (IRA), 401(k), or Keogh Account The taxpayer is not retired or close to retirement Equity is the cash value less any tax consequences for liquidating the account and early withdrawal tax. The account is an Individual Retirement Account (IRA), 401(k), or Keogh Account The taxpayer is retired or close to retirement
- Equity is the cash value less any tax consequences for liquidating the account and early withdrawal tax.
- The plan may be considered as income, if the income from the plan is required to provide for necessary living expenses.
The contribution to a retirement plan is required as a condition of employment The taxpayer is able to withdraw funds from the account Equity is the amount the taxpayer can withdraw less any tax consequences and early withdrawal tax. The contribution to an employer's plan is required as a condition of employment The taxpayer is unable to withdraw funds from the account but is permitted to borrow on the plan Equity is the available loan value. Any retirement plan that may not be borrowed on or liquidated until separation from employment The taxpayer is retired, eligible to retire, or close to retirement Equity is the cash value less any tax consequences for liquidating the account and early withdrawal tax, or consider the plan as income if the income from the plan is necessary to provide for necessary living expenses. The plan may not be borrowed on or liquidated until separation from employment and the taxpayer has no vested interest The taxpayer is not eligible to retire until after the period for which we are calculating future income The plan has no equity. The plan includes a stock option The taxpayer is eligible to take the option Equity is the value of the stock at current market price less any expense to exercise the option.
- The taxpayer's declared value of household goods is usually acceptable unless there are articles of extraordinary value, such as antiques, artwork, jewelry, or collector's items. Exercise discretion in determining whether the assets warrant personal inspection.
- There is a statutory exemption from levy that applies to the taxpayer's furniture and personal effects. This exemption amount is updated on an annual basis.
Note:This exemption applies only to individual taxpayers.
- When determining the value consider the following:
If… Then… The taxpayer qualifies as head of household, single, or married Grant a reduction in the value of personal effects for the levy exemption amount. The property is owned jointly with any person who is not liable for the tax Determine the value of the taxpayer's proportionate share of property before allowing the levy exemption. Some of the furniture or fixtures are used in a business They are not personal effects, but they may qualify for the levy exemption as tools of a trade. If the property has an encumbrance with priority over the NFTL Allow the encumbrance in addition to the statutory exemption.
- Equity in motor vehicles, airplanes, and boats must be determined and included in the RCP. The general rule for determining NRE, as discussed in IRM 220.127.116.11.1 above, applies when determining equity in these assets. Unusual assets such as airplanes and boats may require an appraisal to determine FMV, unless the items can be located in a trade association guide. The case file should document how the values were determined.
- It is not necessary to personally inspect automobiles used for personal transportation. When it appears reasonable, accept the taxpayers stated value. If the taxpayer failed to provide the value or the value appears to be unreasonable, consult a trade association guide. Generally, the Private Party or equivalent value should be used. In most cases, the vehicle will be discounted for the FMV to 80% to arrive at the QSV.
- When these assets are used for business purposes, they may be considered income producing assets. See IRM 18.104.22.168.1 for a full discussion on the treatment of income producing assets.
- Verify types of ownership through warranty and mortgage deeds.
- The FMV of the property must be established. FMV is defined as the price at which a willing seller will sell and a willing buyer will pay for the property, given time to obtain the best and highest possible price. When a question of value arises, a discussion with the taxpayer and/or representative may be necessary to establish an accurate value. The following methods may be used to establish FMV:
- Verification through internal sources; such as Accurint.
- Recent purchase price or an existing contract to sell.
- Recent appraisals.
- Real estate tax assessment.
- Market comparable.
- Homeowner’s insurance policy(s).
- Once the FMV of real estate is established, a determination regarding a reduction of value for offer purposes must be made. Procedures outlining reduction to QSV are discussed in IRM 22.214.171.124.1 above.
- Equity in real estate is included when calculating the taxpayer's RCP in an acceptable offer amount. This may be established through HUD closing statements, statements from the lenders, etc.
- The OE/OS should document what methods were used in determining the value of the property and the reason for applying any value other then the QSV.
- For real estate and other related property held as tenancies by the entirety when the tax is owed by only one spouse, the taxpayer's portion is usually 50% of the property's NRE.
- Accounts and notes receivable are considered assets unless a determination is made to treat them as part of the income stream when they are required for the production of income. When it is determined that liquidation of a receivable would be detrimental to the continued operation of an otherwise profitable business, it may be treated as future income.
- Accounts Receivable – Value all accounts receivable at 100% of the balance due, unless the taxpayer can substantiate the account has been delinquent over 90 days. Accounts receivable that are current (i.e. less than 90 days past due) generally should not be discounted at Quick Sale Value (QSV). If the account is determined to be delinquent it may be discounted appropriately based on the age of the receivable and the potential for collection. However, supporting documentation is required to substantiate accounts the taxpayer claims are delinquent over 60 days; such as a request for the taxpayer to provide an aging report. If the account is over 90 days and the taxpayer fails to provide substantiation, it will be valued at 100%.
- To determine the value of accounts receivable:
- When the receivables have been sold at a discount or pledged as collateral on a loan, apply the provisions of IRC 6323(c) to determine the lien priority of commercial transactions and financing agreements.
- Closely examine accounts of significant value that the taxpayer is not attempting to collect, or that are receivable from officers, stockholders, or relatives.
- To determine the value of a note receivable, consider the following:
- Whether it is secured and if so by what asset(s),
- What is collectible from the borrower, and
- If it could be successfully levied upon.
- Inventory, machinery, and equipment may be considered income producing assets. See IRM 5.8.5..5.1, Income Producing Assets, above when it is determined that liquidation of these assets would be detrimental to the continued operation of an otherwise profitable business.
- To determine the value of business assets, use the following:
- For assets commonly used in many businesses, such as automobiles and trucks, the value may be easily determined by consulting trade association guides.
- For specialized machinery and equipment suitable for only certain applications, consult a trade association guide, secure an appraisal from a knowledgeable and impartial dealer, or contact the manufacturer.
- When the property is unique or difficult to value and no other resource will meet the need, follow local procedure to request the services of an IRS valuation engineer.
- Consider asking the taxpayer to secure an appraisal from a qualified business appraiser.
Note:Business appraisals should only be requested when the cost of the appraisal is justified by the complexity of the business activity and where there is a market for similar businesses in the taxpayer's location.
- There is a statutory exemption from levy that applies to an individual taxpayer's tools used in a trade or business, which will be allowed in addition to any encumbrance that has priority over the NFTL. This exemption for tools of the trade generally does not apply to automobiles. The levy exemption amount is updated on an annual basis.
- Evaluation of a business as a going concern is sometimes necessary when determining RCP of an operating business owned individually or by a corporation, partnership, or LLC. This analysis recognizes that a business may be worth more than the sum of its parts, when sold as a going concern.
- To determine the value of a business as a going concern consider the value of assets, future income, and intangible assets such as:
Generally, the difference between what an ongoing business would realize if sold on the open market as a going concern and the traditional RCP analysis is attributable to the value of these intangibles.
- Ability or reputation of a professional.
- Established customer base.
- Prominent location.
- Well known trade name, trademark, or telephone number.
- Possession of government licenses, copy rights, or patents.
- Request the assistance of an IRS valuation engineer when a difficult or complex valuation is necessary.
- When determining the equity to include in RCP for an individual taxpayer who has an interest in a business entity, consideration should be given to the taxpayer's control over the business.
- The justification for the value used should be clearly documented in the case history.
- The value of dissipated assets should not automatically be included in the calculation of the RCP. Each particular case must be evaluated on its own merit. This section discusses treatment of the value of these assets when considering an OIC.
- During an offer investigation it may be discovered that assets (liquid or non liquid) have been sold, gifted, transferred, or spent on non-priority items or debts and are no longer available to pay the tax liability.
Note:The scope of an offer investigation should not be expanded beyond the requirements defined in IRM 126.96.36.199, for the sole purpose of attempting to locate dissipated assets.
- Once it is determined that a specific asset has been dissipated, the investigation should address whether the value of the asset, or a portion of the value, should be included in an acceptable offer amount.
- Inclusion of the value of dissipated assets must clearly be justified in the case file and documented on the ICS or AOIC history, as appropriate. A determination that assets were dissipated should include an analysis of the following facts:
- When the asset(s) were dissipated in relation to the offer submission. Absent unique circumstances, the value of assets dissipated more than 5 years prior to the offer submission will not be included in the RCP.
- When the assets were used by the taxpayer to pay for existing on-going business operating expenses, the funds should not be considered to be a dissipated asset.
- When the asset(s) were dissipated in relation to the liability.
- How the asset was transferred.
- If the taxpayer realized any funds from the transfer of assets.
- How any funds realized from the disposition of assets were used.
- The value of the assets and the taxpayer's interest in those assets.
- When it can be shown through internal research or substantiation provided by the taxpayer that the funds were needed to provide for necessary living expenses, these amounts should not be included in the RCP calculation.
Example:(1) Dissolving an IRA during unemployment. Review of available internal sources verified the taxpayer’s income was insufficient to meet necessary living expenses. In this case, do not include the funds up the amount needed to meet allowable expenses in the RCP calculation.
Example:(2) Substantial amount withdrawn from bank accounts. Taxpayer provided supporting documentation that funds were used to pay for medical expenses. This amount will not be included in the RCP calculation.
Example:(3) Disposing of an asset and using the funds to purchase another asset that is included in the offer evaluation. Do not include the calculation as a dissipated asset.
- If the tax liability did not exist prior to the transfer or the transfer occurred prior to the taxable event giving rise to the tax liability, generally, a taxpayer cannot be said to have dissipated the assets in disregard of the outstanding tax liability.
Example:If a taxpayer withdraws funds from an IRA to invest in a business opportunity but does not have any tax liability prior to the withdrawal, the funds were not dissipated.
- If the investigation clearly reveals that assets have been dissipated with a disregard of the outstanding tax liability, consider including the value in the RCP calculation.
Example:(1) Dissipated Assets that may result in an increase to the RCP calculation are dissolving an IRA account or refinancing equity in property to pay for a child’s wedding or vacation, and sale of real estate and gifting the funds from the sale to family members.
Example:(2) If taxpayer refinanced their home and used a portion of the funds to pay for living expenses or medical costs, only the portion of the funds that were not used for necessary living expenses should be considered for inclusion as a dissipated asset when calculating the RCP.
Example:(3) The taxpayer had a prior OIC rejected based upon equity in assets. The taxpayer subsequently secured a second mortgage on his residence and submitted a new offer. The taxpayer used a portion of the second mortgage loan to pay unsecured debts and was not able to account where the rest of the loan proceeds were applied. Consider including the amount of the second mortgage loan as part of the RCP, unless exceptional circumstances exist.
- If the taxpayer does not provide information showing the disposition of funds from transferred assets, consider including all of these amounts in an acceptable offer amount. Prior to including the dissipated asset in the RCP, the taxpayer should be contacted (preferably by telephone) and afforded the opportunity to explain or verify the dissipation of the asset.
- If during the investigation it is determined the assets were deliberately dissipated in anticipation of the tax liability or the filing of the OIC, consideration should be given to rejecting the offer under public policy criteria. These instances should be rare.
- The case history must be clearly documented with the basis for your decision regarding the dissipated asset.
- Retired debt is an expected change in necessary or allowable expenses. The necessary/allowable expenses may decrease, which would change the taxpayer’s ability to pay.
Example:Required child support payments may stop before the future income period ends. It is expected that these retired payments would increase the taxpayer's ability to pay.
- Inclusion of retired debt should not be automatically included in the calculation of the RCP. The OE/OS should use judgment in determining whether inclusion of the retired debt is appropriate based on the facts of the case; such as special circumstances or ETA situations.
- When retiring a vehicle the meets the requirements defined in IRM 188.8.131.52.3(5), the $200 payment should be allowed through the period future income is calculated.
- The case histories must be documented to support the inclusion or exclusion of the retired debt.
- Future income is defined as an estimate of the taxpayer's ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future. See IRM 184.108.40.206(2) table for calculation.
- As a general rule, the taxpayer’s current income should be used in the analysis of future ability to pay.
Note:This may include situations where the taxpayer’s income is recently reduced based on a change in occupation or employment status.
- Consideration should be given to the taxpayer's overall general situation including such facts as age, health, marital status, number and age of dependents, level of education or occupational training, and work experience.
- Situations that may warrant placing a different value on future income than current or past income indicates are discussed in the table below. Additionally, securing a future income collateral agreement based on the taxpayer’s earnings potential may be appropriate and are discussed in more detail in IRM 220.127.116.11 and IRM 5.8.6, Collateral Agreements.
If… Then… Income will increase or decrease or current necessary expenses will increase or decrease Adjust the amount or number of payments to what is expected during the appropriate number of months. A taxpayer is temporarily or recently unemployed or underemployed Use the level of income expected if the taxpayer were fully employed and if the potential for employment is apparent. Each case should be judged on its own merit, including consideration of special circumstances or ETA issues.
Example:Unemployed – The taxpayer is a construction worker who currently is not employed due to lack of work during the winter months. Since this loss of employment during the winter is normal for the taxpayer, use of the taxpayer’s previous annual income or you may income averaging to accurately determine the taxpayer’s income.
Example:Underemployed – The taxpayer is a teacher and is currently employed at a lesser paying job, yet will begin or return to work as a teacher when the school year begins in the fall, the taxpayer is considered to be currently underemployed. Use the anticipated income once the taxpayer is fully employed.
A taxpayer is unemployed and is not expected to return to their previous occupation or previous level of earnings Contact the taxpayer to discuss the expected future level of income. When considering future income, also allow anticipated increases in necessary living expenses and/or applicable taxes.
Note:Each case should be judged on its own merit, including consideration of special circumstances or ETA issues.
A taxpayer is long-term unemployed Do not income average. The taxpayer’s current income should be used in the future income calculation. If there is a verified expectation the taxpayer will be securing employment then the use of anticipated future income may be appropriate. Anticipated future income should not be used in situations where the future employment is uncertain.
Example:Taxpayer has been unemployed for over one year. There are currently no employment opportunities for the taxpayer and the household is living on one income. Use of the taxpayer’s current income with a future income collateral agreement is appropriate.
A taxpayer is long-term underemployed Do not income average. Use the taxpayer’s current income.
Example:The taxpayer was previously employed in a manufacturer plant making $75,000 per year. There are currently no opportunities for the taxpayer to secure employment making the same rate of pay as their prior job. Their income is now $25,000 per year with no anticipated increase. Use the current income only.
A taxpayer has an irregular employment history or fluctuating income Average earnings over the three prior years. The use of a time period other than three years should be the exception and only when specific circumstances are present.
Example:The taxpayer is a stock broker whose income in 2007 was $150,000 and income in 2008 was $25,000. In this case, you should consider income averaging the prior three years or secure a future income collateral agreement if the offer is accepted.
Note:This practice does not apply to wage earners. Wage earners should be based on current income unless the taxpayer has unique circumstances.
A taxpayer is in poor health and their ability to continue working is questionable Reduce the number of payments to the appropriate number of months it is anticipated the taxpayer will continue working. Consider special circumstance situations when making any adjustments.
Example:Taxpayer has a serious health issue and it is anticipated they will be unable to work after six months. Use the taxpayer’s current income for six months then reduce their income to the anticipated amount they will be receiving after they are unable to work.
A taxpayer is close to retirement and has indicated they will be retiring If the taxpayer can substantiate retirement is imminent, adjust the taxpayer’s future earnings and expenses accordingly. If it cannot be substantiated, base the calculation on current earnings. At this point, it may be appropriate to discuss other options available to the taxpayer, for example an installment agreement.
Example:(1) The taxpayer is 65 years of age and has indicated they will retire at the age of 66. They provide copies of documents that have been submitted to their employer discussing their retirement date. Use the taxpayer’s current income until the taxpayer’s anticipated retirement date, then adjust the taxpayer’s income to reflect the amount expected in retirement.
Example:(2) The taxpayer is 62 years of age, the taxpayer is in good health, and their income has remained stable for the past three years. The taxpayer states they would like to retire at age 65. Use the taxpayer’s current income and if the RCP exceeds the offer amount, discuss the option of securing an installment agreement until the taxpayer actually retires, at which time an offer may be appropriate.
A taxpayer will file a petition for liquidating bankruptcy Consider reducing the value of future income. The total value of future income should not be reduced to an amount less than what could be paid toward non-dischargeable periods, or what could be recovered through bankruptcy, whichever is greater. When considering a reduction in future income, also consider the intangible value to the taxpayer of avoiding bankruptcy. Refer to IRM 18.104.22.168.
- Judgment should be used in determining the appropriate time to apply income averaging on a case by case basis. All circumstances of the taxpayer should be considered when determining the appropriate application of income averaging, including special circumstances and ETA considerations. Below are some examples of when income averaging may or may not be appropriate.
Example:(1) Taxpayer’s spouse has not worked for over two and one-half years and has no expectations of returning to work. Do not average income for the spouse's past employment.
Example:(2) Taxpayer has been unemployed for over one year and provided proof that Social Security Disability is the sole source of income. Do not apply income averaging in this case but use current income to determine the taxpayer’s future ability to pay.
Example:(3) The taxpayer was incarcerated and unable to work for the past four years and provided proof that a relative is paying for all expenses, including child support payments. The taxpayer has no skills or promise of work in the near future but is planning on attending trade school to improve his chances of getting a job. Do not include income prior to the incarceration. In this case, since the taxpayer has no skills or promise of employment, their future income value may be determined to be zero. Consideration should be given whether it would be in the best interest of the government to accept the offer or reject the offer in favor of other case resolutions.
Example:(4) The taxpayer recently began working after several months of unemployment. Use the most recent three months pay statements to determine future income. Since the taxpayer is a wage earner, the use of income averaging over the prior three years of income is not appropriate.
- In situations where the taxpayer’s income does not appear to meet their stated living expenses the difference should not be included as additional income to the taxpayer, unless there are clear indications additional income not included on the collection information statement is being received and will continue to be received by the taxpayer. Discussion with the taxpayer/POA and a review of documents submitted by the taxpayer must take place to determine the appropriateness of including an additional amount in the calculation of future income. Verification of the source of unexplained bank deposits or statements from the source of gifts may be required to correctly determine the taxpayer’s current income. Telephone contact is recommended to expedite the case processing.
Example:(1) The taxpayer has been receiving gifts from their parents to meet current living expenses for the past six months. The taxpayer has no guaranteed right to the funds in the future and the amount does not appear to be based on the transfer of assets to the parents. The gift amount should not be included as income.
Example:(2) The taxpayer has been receiving an amount each month that only began recently, which they state is a gift from a friend. Further research has determined the taxpayer is in business with the friend and the amount is from their business. This amount should be included as income to the taxpayer. Additionally, consideration should be given to referring the taxpayer and the business income tax return to Examination.
Example:(3) The taxpayer had gambling winnings over a period of time, but is not consistent. Do not include those winnings as additional income on the IET. This does not apply to professional gamblers.
Example:(4) The collection information statement (CIS) submitted by the taxpayer included $3.000.00 of monthly income, which is verified by paystubs. The CIS submitted by the taxpayer includes $4,000.00 of expenses. An additional $1,000.00 should not be added to the taxpayer’s income based solely on the fact it appears the taxpayer has been meeting the living expenses included on the CIS. Discussion with the taxpayer or representative is necessary to clarify the discrepancy prior to including the amount as additional income.
- Employees need to exercise good judgment when determining future income. The history must be clearly documented and support the known facts and circumstances of the case and include analysis of the supporting documents. Each case needs to be evaluated on its own particular set of facts and circumstances. The history must clearly explain the reasoning behind our actions.
- In some instances, it may be difficult to calculate the taxpayer’s anticipated income. While the use of income averaging is one method available and should be used when averaging the taxpayer’s income provides a reasonable calculation of the taxpayer’s future earnings potential, it may also be appropriate to use the taxpayer’s current income and secure a future income collateral agreement. The use of a future income collateral agreement will protect the government’s interest in any substantial increase in the taxpayer’s earnings.
- A future income collateral agreement is most appropriate in situations where the taxpayer’s future income is uncertain, but it is reasonably expected that the taxpayer will be receiving a substantial increase in income.
- A future income collateral agreement should not be used to accept an offer for a lesser amount than the calculated RCP. See IRM 22.214.171.124.1, Future Income, for instructions on completing collateral agreements.
Example:(1) A taxpayer is currently in medical school; upon graduation income should increase dramatically. Consider securing a future income collateral agreement.
Example:(2) A taxpayer recently secured a job as an attorney with a starting salary of $80,000 per year, with potential for significant increases in salary. Consider securing a future income collateral agreement.
Example:(3) A taxpayer is a real estate agent who has had two years of high income and the current income is significantly diminished. Based on the current real estate market, it may be appropriate to use the taxpayer’s current income and secure a future income collateral agreement in lieu of income averaging.
Example:(4) A taxpayer’s RCP is $12,000 but has offered $10,000 plus a future income collateral agreement. A future income collateral agreement is not appropriate in lieu of the taxpayer increasing their offer to the RCP amount. If the taxpayer is not willing to increase their offer to the RCP amount, the offer should be rejected.
- Allowable expenses consist of necessary and conditional expenses, as defined in IRM 5.15.1, Financial Analysis Handbook, and further discussed below. Use the amount shown in the expense standard schedules unless that amount would result in the taxpayer not having adequate means to provide for basic living expenses. Once allowable expenses are determined, they are used to calculate the amount that can be collected from the taxpayer's future income. See IRM 126.96.36.199, above, for additional information on future income.
- A necessary expense is one that is necessary for the production of income or for the health and welfare of the taxpayer's family. IRM 5.15.1, Financial Analysis Handbook, discusses the national and local expense standards, which serve as guidelines to provide accuracy and consistency in determining a taxpayer's basic living expenses. The standards are available on the IRS web site and are periodically updated.
- Taxpayers are allowed the National Standard Expense amount for their family size, without questioning the amount actually spent. If the total amount claimed is more than the total allowed by the National Standards, the taxpayer must provide documentation to substantiate and justify that the allowed expenses are inadequate to provide basic living expenses. All deviations from the national standards must be verified, reasonable and documented in the case history.
- National and local expense standards are guidelines. If it is determined a standard amount is inadequate to provide for a specific taxpayer’s basic living expenses, allow a deviation. Require the taxpayer to provide reasonable substantiation and document the case file. See IRM 188.8.131.52(5).
- Generally, the total number of persons allowed for national standard expenses should be the same as those allowed as dependents on the taxpayer's current year income tax return. There may be reasonable exceptions. Fully document the reasons for any exceptions.
Example:Foster children or children for whom adoption is pending; Custodial parent released the dependency exemption to ex-spouse.
- A deviation from the standards should not be considered merely because it is inconvenient for the taxpayer to dispose of high value assets. In some situations, taxpayer's may be expected to make life-style choices that will facilitate collection of the delinquent tax.
- When determining a taxpayer’s housing and utility expense, use an amount sufficient to provide for basic living expenses. Use the amount shown in the expense standard schedules as a guideline unless such use results in the taxpayer not having adequate means to provide for basic living expenses. If it is determined that a standard amount is inadequate to provide for a basic living expenses, allow a deviation. If the amount of the payment cannot be verified through other sources (such as, bank statements), require the taxpayer to provide reasonable substantiation. Deviations from the expense standards must be verified, reasonable, and documented in the case history. Below are two examples, which are not all inclusive. Each decision should be based on the merits of the particular case.
Example:A taxpayer with a physical disability or an unusually large family requires a housing cost that is not covered by the local standard. Require the taxpayer to provide copies of mortgage or rent payments, utility bills and maintenance costs to verify the necessary amount.
Example:A taxpayer has owned their home for several years and the payment is above the established standard. Your investigation indicates the taxpayer would not be able to rent an apartment for less than their current loan payment. In that case, you should consider allowing the full amount of the loan payment. Document the case history.
- Absent special circumstances, when determining a taxpayer’s housing and utility expense, use the amount that is claimed or the standard, whichever is less.
- Transportation expenses are considered necessary when they are used by taxpayers and their families to provide for their health and welfare and/or the production of income. Employees investigating OICs are expected to exercise appropriate judgment in determining whether claimed transportation expenses meet these standards. Expenses that appear excessive should be questioned and, in appropriate situations, disallowed.
- The transportation standards consist of nationwide figures for loan or lease payments referred to as ownership costs and additional amounts for operating costs broken down by Census Region and Metropolitan Statistical Area. Operating costs include maintenance, repairs, insurance, fuel, registrations, licenses, inspections, parking and tolls.
- Ownership Expenses – Expenses are allowed for purchase or lease of a vehicle. Taxpayers will be allowed the local standard or the amount actually paid, whichever is less, unless the taxpayer provides documentation to verify and substantiate that the higher expenses are necessary. Generally, auto loan or lease payments will not continue as allowed expenses after the terms of the loan/lease have been satisfied. However, depending on the age or condition of the vehicle, the complete disallowance of the ownership expense may result in a transportation expense allowance that does not adequately meet the necessary expenses of the taxpayer. See paragraph (5) below for the definition and allowances of an older vehicle.
- Operating Expenses – Allow the full operating costs portion of the local transportation standard, or the amount actually claimed by the taxpayer, whichever is less, unless the taxpayer provides documentation to verify and substantiate that the higher expenses are necessary. Substantiation for this allowance is not required.
- In situations where the taxpayer has a vehicle that is currently over six years old or has reported mileage of 75,000 miles or more, an additional monthly operating expense of $200 will generally be allowed per vehicle.
Example:(1) The taxpayer who has a 1998 Chevrolet Cavalier with 50,000 miles, will be allowed the standard of $231 per month plus $200 per month operating expense (because of the age of the vehicle), for a total operating expense allowance of $431 per month.
Example:(2) The taxpayer has a 1995 Ford Taurus, with 90,000 reported miles. The vehicle was bought used, and the auto loan will be fully paid in 30 months, at $300 per month. In this situation, the taxpayer will be allowed the ownership expense until the loan is fully paid; i.e., $300 plus the allowable operating expense of $231 per month, for a total transportation allowance of $531 per month. After the auto loan is "retired" in 30 months, the ownership expense is not applicable; however, at that point, the taxpayer will be allowed a $200 operating expense allowance, in addition to the standard $231, for a total operating expense allowance of $431 per month.
- If a taxpayer claims higher amounts of operating costs because he commutes long distances to reach his place of employment, he may be allowed greater than the standard. The additional operating expense would generally meet the production of income test and therefore be allowed if the taxpayer provides substantiation.
- If the amount claimed is more than the total allowed by any of the transportation standards, the taxpayer must provide documentation to verify and substantiate that those expenses are necessary. All deviations from the transportation standards must be verified, reasonable and documented in the case history.
- Other expenses may be allowed in determining the value of future income for offer purposes. The expense must meet the necessary expense test by providing for the health and welfare of the taxpayer and/or his or her family or must be for the production of income. This is determined based on the facts and circumstances of each case.
- Repayment of loans incurred to fund the offer and secured by the taxpayer's assets will be allowed, if the asset is necessary for the health and welfare of the taxpayer and/or their family, i.e. taxpayer’s residence, and the repayment amount is reasonable. The same rule applies whether the equity is paid to IRS before the offer is submitted or will be paid upon acceptance of the offer. See IRM 184.108.40.206.1, Income-Producing Assets, to determine when to allow repayment of loans on those type of assets if they are used to fund the offer.
Example:(1) The taxpayer has secured a 2nd mortgage against their residence which will be paid toward the offer amount upon acceptance. The payment is reasonable based on the amount borrowed and terms of repayment. The payment should be allowed as an expense on the Income/Expense Table.
Example:(2) A taxpayer may have a liability for a court ordered judgment that is senior to the NFTL. Unless the taxpayer is actually making payments on that liability; it is not considered as an allowable monthly expense.
- Repayment of student loans secured by the federal government will be allowed only for the taxpayer's post-secondary education. If student loans are owed but no payments are being made, do not allow them, unless the non-payment is due to temporary job loss or illness.
- Education expenses will be allowed only for the taxpayer and only if it they are required as a condition of present employment. Expenses for dependents to attend colleges, universities, or private schools will not be allowed unless the dependents have special needs that cannot be met by public schools.
- Child support payments for natural children or legally adopted dependents may be allowed based on the taxpayer's situation. A copy of the court order and proof of payments should be provided. If no payments are being made, do not allow the expense, unless the nonpayment was due to temporary job loss or illness.In situations where a court order is pending, additional verification may be required. For example, a draft or copy of the court order may be requested.
Example:The taxpayers are separated and a court date has not been established but child support payments are being made and the taxpayer provided verification of payments.
Note:Do not allow payments for expenses, such as college tuition or life insurance for children, made pursuant to a court order. The fact that the taxpayer may be under court order to make payments with respect to such expenses does not change the character of the expense. Therefore, that the taxpayer is under court order to provide a payment should not in the ordinary course elevate that expense to allowable status as an offer expense, when the Service would not otherwise allow it.
- Substantiation of claimed health care expenses of less than the allowable standard is not required.
- Monthly payments to state or local taxing agencies should not be allowed as a necessary expense, even if the state or local taxing agency has a lien that is senior to the IRS's lien or is collecting funds through a wage attachment or approved installment agreement. State and federal liens (regardless of priority) attach simultaneously to after-acquired-property. In general, if the federal tax lien attaches to after acquired property simultaneously with a competing perfected lien, the federal tax lien will take priority (see IRM 220.127.116.11.5, After-Acquired Property). Since future earnings of the taxpayer are after-acquired property, the Service has first right to the earnings. Explain to the taxpayer that although the payment may be allowed in an installment agreement, where the tax will be paid in full, it will not be allowed for computation of an acceptable offer amount because the Federal government has priority rights to the funds.
Note:State or local liens may enjoy a priority in fixed payment streams such as annuity payments. If necessary, consult with Area Counsel to determine lien priorities.
- Generally, charitable contributions are not allowed in the RCP calculation. However, charitable contributions may be an allowable expense if they are a condition of employment or meet the necessary expense test.
Note:A minister is required to tithe according to his employment contract. See IRM 18.104.22.168, Financial Analysis Handbook, Other Expenses.
- Payments being made to fund or repay loans from voluntary plans will not be allowed. Taxpayers who cannot repay these loans will have a tax consequence in the year that the loan is declared in default and that consequence should be estimated and allowed as an additional tax expense on the IET for the required number of months necessary to cover the additional tax consequence. The OE/OS should request the taxpayer or their representative to estimate the tax ramification of the failure to re-pay the loan, or may request assistance from the Examination function or Customer Service to determine the tax consequences.
- Current taxes are allowed regardless of whether the taxpayer made them in the past or not. If an adjustment to the taxpayer’s income is made, an adjustment of the tax liability must also be made. Current taxes include federal, state, and local taxes. In a wage earner situation, allow the amount shown on the pay stub. If the current withholding amount is insufficient, the tax expenses should be based on the actual tax expense.
- Offers may be received where the taxpayers have not provided either proof of payment for certain monthly expenses claimed on the Form 433-A or statements. Often the taxpayers are not actually paying claimed expenses, or they are not allowable under offer program guidelines. If a taxpayer does not substantiate claimed expenses for Form 433-A categories of court ordered payments, child/dependent care, life insurance, other secured debt, or other expenses the OE/OS will complete the IET assuming that the taxpayer is not making any payments for the particular unsubstantiated expense.
Example:(1) Taxpayers frequently list their unsecured credit card bills under secured debt or other expenses and will not be considered as an allowable monthly expense.
Example:(2) A taxpayer may have a liability for a court ordered judgment that is senior to the NFTL, unless the taxpayer is actually making payments on that liability; it is not considered as an allowable monthly expense.
- Conditional expenses are defined in IRM 5.15, Financial Analysis Handbook, as those that may be allowed when the tax will be paid in full by an installment agreement within 5 years. For offer purposes, the full amount of the tax will not be collected, therefore, the rules for conditional expenses do not apply. However, an offer may be accepted for less than the RCP when special circumstances are present in accordance with IRM 5.8.11, Effective Tax Administration.
- The one year rule which allows time for a taxpayer to adjust current expenses to meet the terms of an installment agreement is not allowed for Offers in Compromise.
- The purchase of discretionary investments is not allowed in the calculation of the RCP.
Example:Payroll savings plans, purchase of whole life policies, mutual funds, or voluntary retirement plan contributions.
- Generally, a taxpayer will be allowed only the expenses the taxpayer is required to pay. Consideration must be given to situations where the taxpayer shares expenses with another. Shared expenses may exist in one of two situations:
- An offer is submitted by a taxpayer who shares living expenses with another individual who is not liable for the tax.
- Separate offers are submitted by two or more persons who owe joint liabilities and/or separate liabilities and who share the same household.
- Generally, the assets and income of a not liable person are excluded from the computation of the taxpayer’s ability to pay. Treasury Reg. 301.7122-1 (c) (2) (ii) (A) only applies in not liable and not in partially liable situations.
Exception:Related offers including both joint and separate liabilities. The amount of both offers should equal the total amount collectable from the shared household. IRM 22.214.171.124 above provides that the equity in jointly owned assets should be applied first to the joint liabilities and then to the separate liabilities.
- Below are some examples of joint and separate liabilities.
Exception:Community property states. Follow community property laws in these states to determine what assets and income of the non-liable person are subject to the collection of tax. See IRM 126.96.36.199.2 Community Property Law.
Exception:Domestic partnership states. Follow domestic partnership laws in these states to determine what assets and income of the non-liable person are subject to the collection of tax.
If... Then... A Joint offer was submitted on joint tax liabilities and a separate offer was also submitted by one spouse with a separate tax liability Compute the RCP including the joint income and assets. Allocate the total collection potential to both offers. If the offer is to be accepted, it may be necessary to secure amended Form(s) 656 from the taxpayers reflecting the proportionate amount of the RCP on the joint liability(s) and the remaining amount RCP on the separate liability(s). The total offer amount must exceed the total RCP. Separate offers were submitted by joint taxpayers Compute the RCP based on their separate income(s) and assets using the allocations described in 188.8.131.52, taking into consideration community property laws, if applicable. A joint offer was submitted from taxpayers residing in separate households Compute two separate RCPs based on their separate income(s) and expenses. Contact the taxpayers individually to discuss the RCP based on his or her individual financial analysis, preferably by telephone. Advise him or her that the RCP is based on their individual income and assets and they should discuss the outcome with the related party to determine if a joint offer amount should be submitted If they agree to submit a joint offer amount based on the individual RCPs, amend the Form 656 to include both RCPs.
Caution:Do not disclose the financial information of the individual to the other taxpayer. It will be at the taxpayer’s discretion to discuss their financial information and determine whether an amended offer should be submitted to include both RCPs.
- The OE/OS should secure sufficient information concerning the non-liable person’s assets and income to determine the taxpayer’s proportionate share of the total household income and expenses. Review the entire household's information and:
- Determine the total actual household income and expense.
- Determine what percentage of the total household income the taxpayer contributes.
- Determine allowable expense amounts using the rules in this chapter and IRM 5.15.1, Financial Analysis Handbook.
- Determine which expenses are shared and which expenses are the sole responsibility of the taxpayer.
- Apply the taxpayer's percentage of income to the shared expenses.
- Verify that the taxpayer actually contributes at least this amount to the total household expense.
- Do not allow the taxpayer any amount paid toward the other person's discretionary expenses.
- Shared expense calculations between spouses are used when the parties live in a separate property state or state law permits the parties to separate their incomes and the non-liable spouse does not agree to have their income considered in the repayment of the liable spouse’s tax debt (IRM 184.108.40.206(2)). If the non-liable spouse does not agree to have their income considered in the repayment amount, determine the income percentages as stated in IRM 220.127.116.11.After determining the percentage of income of the liable spouse, that percentage is multiplied against the National Standards amount for the household, the Local Housing and Utilities standard and against the Local Transportation standard for ownership and operating cost [IRM 18.104.22.168(3)]. The National Out-of-Pocket Health Care Standard allowed would be the above calculated percentage multiplied against the Out-of-Pocket Health Care Standards for the household or the Out-of-Pocket Heath Care Standard for one person, whichever is greater. However, in all allowable expenses except the National Standards, the liable spouse can only claim the amount they actually pay [IRM 22.214.171.124 (3) (f)]. Consideration should also be given to any separate expenses the liable spouse may be solely responsible for paying, such as alimony, child care etc.
- If the non-liable person’s income is not provided or cannot be verified internally, the liable taxpayer should be allowed only the national and local standards for 1 person with no dependents. In those cases where the non-liable person refuses to provide the supporting documentation (if the expenses are reasonable) you may consider allowing up to 50% of the additional necessary household expenses.
- If an in-house verification is conducted on the not liable person, this information cannot be relayed to the taxpayer. This is not an Unauthorized Access (UNAX) violation but would be considered an unauthorized disclosure if any information is shared with the taxpayer.
- When the taxpayer can provide documentation that income is not mingled (as in the case of roommates who share housing) and responsibility for household expenses are divided equally between co-habitants (as documented by rental agreements, bank statement analysis, etc.), the total allowable expenses should not exceed the total allowable housing standard for the taxpayer.In this situation, it would not be necessary to obtain the income information of the other person(s). However, sufficient financial information must be secured to verify the total household expenses and prove that the taxpayer is paying his/her proportionate share. The investigating employees should exercise sound judgment in these situations to determine which approach is most appropriate, based on the facts of each case.
Example:When the taxpayer is renting an apartment or room and the owner of the property is not the taxpayer, the rental agreement or signed statement from the owner of the property should support the decision not to require the owner to divulge any personal information regarding income or household expenses. In this case, the investigating employee should accept the information provided by the taxpayer and make a determination based on that information.
- The use of Decision Point or Decision IA is recommended to assist in this calculation. If Decision Point or Decision IA is not available, the below procedures should be followed.
- Future income is defined as an estimate of the taxpayer's ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future. The number of months used depends on the payment terms of the offer.
- For lump sum cash offers:
If... Then... The offer is to be paid in 5 months or less Project for the next 48 months or the statutory period, whichever is less The offer is payable in more than 5 and up to 24 months Project for the next 60 months or the statutory period, whichever is less The offer is payable more than 24 months Project over the remaining statutory period
- For Short Term Periodic Payment offers project for the next 60 months or the statutory period, whichever is less.
- For Deferred Periodic Payment offers – project for the number of months remaining on the statutory period for collection.
- Generally, the amount to be collected from future income is calculated by taking the projected gross monthly income, less allowable expenses, and multiplying the difference by the number of months applicable to the terms of offer.
- For lump sum cash and short term periodic payment offers, when there are less than 48 or 60 months remaining on the statutory period for collection, use the number of months remaining. To determine the amount collectible from future income on a deferred payment offer through the life of the statutory period for collection, take the following steps:
- Subtract allowable expenses from the monthly income to determine the monthly installment amount.
- Determine the valid CSED for each tax period included in the offer.
- Sort the tax periods by earliest CSED.
- For each tax period, determine the number of months remaining on the statutory period for collection. Begin with the day the offer was determined to be processable and end on the CSED. Round partial months up to the nearest whole month.
- For each tax period, determine the number of installments that may be applied before the statutory period expires. Continue applying to the statutory period until there are no available funds. Round partial payments up to the nearest whole payment.
- Calculate the number of installments applied to each period. For succeeding periods, do not count months on the CSED that were used for applying installments to prior periods.
- Add the number of installments applied to all the periods and multiply the sum by the monthly installment amount to arrive at the total amount collectible from future income. For examples of situations where the amount that may be applied to a period is limited, see Exhibits 5.8.5-1 through 3.
- The 16 year limitation from the date of assessment discussed in IRM 126.96.36.199.7.7(1) should also be taken into consideration in the calculation of the taxpayer’s Future Income Value (FIV) as discussed in IRM 188.8.131.52 – Calculation of Future Income. These provisions only apply to taxpayers who are cooperative. In situations where the taxpayer is uncooperative, an offer in compromise is not an appropriate case resolution.
Note:If the number of months remaining until the 16 year limitation period is less than the 48 or 60 month factor in certain cash or short term periodic payment offers, then the number of months remaining until the 16 month limitation period should be used in the FIV calculation. The 16 year limitation period should also be used as the factor in Long Term Periodic Payment offer situations for taxpayers currently outside the country or in situations where the taxpayer has returned from outside the country and the CSED calculation in accordance with IRC 6503(c) is longer than 16 years.
- Collection from a LLC involves unique issues especially when the liabilities include employment or excise taxes. Refer to IRM 5.1.21- Collecting from Limited Liability Companies (LLC) for a complete discussion on the characteristics of a LLC and issues involving collection of liabilities owed by the LLC.
Note:Treasury Regulations issued on August 16, 2007, affect the tax treatment of certain LLCs for excise taxes that accrue on or after January 1, 2008, and for employment taxes on wages paid on or after January 1, 2009.
- While investigating an offer in compromise that involves an LLC, knowing the classification for federal tax purposes in necessary. Yet, classification of the LLC for federal tax purposes does not negate state law provisions concerning the legal status of the LLC. For example:
- Classification of an LLC as a partnership does not mean the member/owners have liability for LLC debts as would be the case in a state law partnership.
- Under certain circumstances, an LLC may be disregarded as an entity separate from its owner. This classification does not mean that an LLC owned by an individual is the equivalent of a sole proprietorship.
- As with any entity, sufficient information must be secured so an informed decision can be made on the acceptability of the taxpayer’s compromise proposal.
- In all instances, a financial statement will be required from the LLC. This includes employment tax liabilities for wages paid prior to January 1, 2009, where the classification of the LLC is a disregarded entity even though the LLC is not the liable taxpayer.
- Financial information of all member owners should also be secured. When a member owner holds only a negligible or token interest, has made no or minimal investment and exercises no control over the corporate affairs, financial information may not be required unless other factors are present to indicate the information is necessary to determine the acceptability of the taxpayer’s offer. Judgment should be exercised in situations where a transfer of assets/interest may have taken place.
- If the taxpayer is unwilling or unable to provide the financial information requested and the information is necessary to determine whether the taxpayer’s offer should be accepted, consider a return as discussed in IRM 184.108.40.206.2.3.
- Taxpayers that previously extended the CSED in connection with an installment agreement may request approval of a deferred payment OIC.
- On March 24, 1998, the Service issued procedures that limited the length of CSED extensions. See IRM 5.14, Installment Agreements, for further instruction on the policy of the Service.
- By policy, if extensions granted prior to October 18, 1999, resulted in collection periods longer than 15 years; and a deferred payment OIC is later submitted on the balance due accounts (subject to the extension), then, for the purpose of reviewing the OIC, CSEDs are considered to be the later of the following:
- The original CSED (10 years from the tax assessment upon which the liability is based); or
- 5 years from the date of acceptance of the OIC; or
- If the current CSED is less than 5 years of acceptance of the OIC, the current extended CSED should be used.
- IDRS will not reflect any adjustments based on these procedures. Therefore, it is essential that case histories be fully documented and reflect the following statement:"Time left prior to the CSED (per IDRS) was not used for computation of the deferred offer payment amount, per IRM 5.8.5."
Note:These procedures do not apply to extensions up to 6 years. They only apply to CSED extensions longer than 5 years, as agreed to prior to October 18, 1999, and that were granted in conjunction with an installment agreement.
- Payment terms are negotiable, but should provide for payment of the offered amount in the least time possible. If a taxpayer is planning to sell asset(s) to fund all or a portion of the offer, the payment terms for the offer should provide for immediate payment of the amounts received from the sale. If the taxpayer is planning to borrow a portion of the money, the OE/OS should determine when the loan will be received and the payment terms of the offer should provide for payment of the borrowed portion at the time the funds are received.
- For those taxpayers who agree to shorter payment terms, fewer months of future income are required:
Payment Type Payment Terms Number of Months Future Income Required Lump Sum Cash 5 or less installments within 5 months 48 months or the remaining statutory period, whichever is less Lump Sum Cash 5 or less installments paid in more than 5 months and less than 24 months 60 months or the remaining statutory period, whichever is less Lump Sum Cash 5 or less installments paid in more than 24 months Number of months remaining on the statute Short Term Periodic Payment Within 6 to 24 months 60 months or the remaining statutory period, whichever is less Deferred Periodic Payment Within time remaining on the statute Number of months remaining on the statute
- While a periodic payment offer is being evaluated by the Service, the taxpayer must make subsequent proposed installment payments as they become due. There is no requirement that the payments be made monthly or in equal amounts. However, the Service is not bound by either the offer amount or the terms. The OE/OS may determine that the proposed offer amount is too low or the payment terms too protracted to recommend acceptance. In this situation, the OE/OS may advise the taxpayer of a larger amount or different terms that would likely be considered for acceptance.
Example:(1) Acceptable Payment Terms for a Short Term Periodic Payment Offer – A taxpayer submits an offer for $10,000. The IRS received date is January 1, 2007. The taxpayer's offer of $10,000 was accepted in November 2007, and the taxpayer remained current on all required payments during the investigation. During the investigation, the taxpayer paid $500. The taxpayer has 24 months from the date of acceptance to complete the terms of the offer. The terms of the offer were $100 every other month for a total of 23 months and the balance would be due on the 24th month. . On the 24th month, January 2009, the taxpayer would then be required to pay the balance of $8,300 ($10,000 less $1,700 [$1,200 in installments plus $500 in installments paid during the investigation]). No adjustments to the terms would be required.
Example:(2) Unacceptable Payment Terms for a Short Term Periodic Payment Offer – A taxpayer submits an offer for $1,000. The IRS received date is January 5, 2010. The taxpayer has 24 months to complete the offer. The taxpayer pays $100 with the offer as the first payment. The taxpayer structures the remaining payments as follows: $100 within 90 days from written notice of acceptance; $100 by the 4th month following the date of the written notice of acceptance of the offer; $100 per month for the next 7 months thereafter for a total of $1,000 ($100 times 10 payments).
Note:Although the taxpayer may technically structure payments in this manner, the Service is not bound by either the offer amount or the terms proposed by the taxpayer, and the offer investigator may negotiate a different offer amount or terms when appropriate. In this case, the taxpayer has proposed payment terms that may not meet the requirements of a short term payment offer, and the taxpayer should be contacted to re-negotiate the offer terms.
- A third party source of funds may be required to make the portion of the monthly payment that is greater than we determined the taxpayer can afford from future income. Document the case history with source of the funds.
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