The function of the Form 433-A is to determine what a taxpayer's monthly excess income is for purposes of IRS collection activity. The calculated monthly excess income figure is the amount the IRS considers a taxpayer has available to make monthly payments to the IRS. In determining a taxpayer's excess income the IRS will routinely disallow any expense claimed as part of a taxpayer's Form 433-A excess income calculation that is not directly related to the taxpayer's, or his or her family's, health, welfare or sustenance. Additionally, the IRS will further limit the food, clothing, housing, utilities and transportation claimed on the Form 433-A by a taxpayer to the lower of the taxpayer's actual expenses or the amounts allowed for these expenses under a set of national and local expense standards called the Collection Financial Standards. The standards are broken down by the number of people in a family and monthly gross income.
The current Collection Financial Standards can be reached via this hyperlink:
http://www.irs.gov/individuals/article/0,,id=96543,00.html
Because of the aforementioned limitations on a taxpayer's actual expenses and because of the fact that the IRS will routinely disallow any expense claimed on Line 44 of Form 433-A for Other Expenses, the final IRS adjusted excess income calculation arrived at on Form 433-A will in most instances make it appear from the IRS's perspective that the taxpayer has extra money available to service IRS debt. Quite often from the taxpayer's perspective they are barely paying their bills or worse yet are upside down each month. Because the IRS adjusted excess income calculation becomes the foundation for calculating a taxpayer's minimum offer, analyzing a taxpayer's expenses using the IRS's collection financial standards quite often produces very strong emotional reactions where a taxpayer is contemplating making an offer in compromise.
The Form 433-A Collection Information Statement absolutely must show all assets and income available to the taxpayer. The IRS offer investigator will use this information to evaluate a taxpayer's offer and will routinely ask the taxpayer to update it or verify certain financial information contained on it several months after submission of the original offer (which is another guaranteed source of aggravation in this process). The 433-A must be filled in completely because the IRS routinely returns offer packages that are incomplete. The Taxpayer should annotate any items that do not apply to them with "N/A" and must provide all the information required to support their 433-A. The items of documentation required to be submitted with the 433-A are clearly indicated on the collection information statements under the signature blocks.
The following documentation is required to support either the assets or the income and expenses listed on the 433-A:
- Bank Accounts-last three months of monthly statements.
- Charge Accounts-last statement of each one.
- Real property-deed and current monthly payment statement from mortgage company.
- Life insurance-copy of policy, or statement of insurance company as to available loan value.
- Securities-any statement of current value.
- Vehicles-copy of title, plus statement from lien holder as to payoff amounts and monthly payments.
- Other assets-statement of value by qualified person as to liquidation value.
- Wages and other income-last three pay stubs or other evidence of income.
- Rent-canceled checks.
- Utilities-three to six months of bills.
- Medical, estimated tax, and court-ordered payments-canceled checks and copies of the court orders.
Additionally the taxpayer must attach following documentation to their 433-A:
- Copy of the taxpayer's most recent tax return (Form 1040, 1040A, or 1040EZ with all schedules)
- Proof of all transportation expenses for the last three months
- Proof of all health care expenses for the last three months
- Kelly Blue Book Report showing the fair market value of the taxpayer's vehicles including an explanation as to what condition the taxpayer's vehicles are in
- For real estate, include either a recent appraisal of the actual property or a report from a real estate agent showing recent comparable sales
On what grounds and in what circumstances will the IRS entertain an Offer in Compromise?
The IRS has the authority to compromise any civil or criminal tax liability before the case has been referred to the Justice Department for prosecution or defense. The vast majority of offers in compromise are submitted during the collection process, by taxpayers who are experiencing financial difficulty which creates doubt as to collectability.
The IRS has complete discretion whether or not to enter into a compromise, and will entertain an offer in compromise based upon one or more of the following grounds:
Doubt as to liability - The taxpayer disputes the existence or amount of the correct tax liability
Offers in compromise based on doubt as to liability are generally summarily rejected because the tax is believed to be correct as assessed by the IRS at the outset of the offer in compromise process.
Doubt as to Collectibility - The taxpayer is unable to pay the liability in full based upon the value of his or her assets and income
Where a taxpayer in unable to pay their tax liability in full, they should consider submitting a Doubt as to Collectibility offer. Factors that support making an offer under this basis include: advanced age, serious illness from which recovery is unlikely, or any other factors that have an impact upon the taxpayer's ability to pay the amounts due the IRS and at the same time continue to provide for the necessary living expenses for the Taxpayer and his or her family. The IRS will generally only consider a Doubt as to Collectibility offer when the taxpayer is unable to pay their taxes in full by liquidating assets and where the taxpayer fails to qualify under current installment agreement guidelines.
An Offer in Compromise based on Doubt as to Collectibility must reflect the taxpayer's reasonable collection potential (RCP). RCP is the amount that the IRS can collect from all available means, including administrative and judicial collection remedies. Absent special circumstances, an offer in compromise based on doubt as to collectibility will be rejected if the taxpayer's RCP is greater than the outstanding tax liability.
Note: the red boxes in the bottom right of the Offer in Compromise Estimate spread sheet entitled Minimum Offer Under Options A, B or C accessible via the hyperlink directly below represent an estimate of a taxpayer's RCP.
The amount offered cannot include any refunds due the taxpayer or amounts that have previously been paid or amounts attached by a notice of levy.
The $150 user fee will not be refunded if an offer is withdrawn, rejected, or returned as unprocessable after acceptance for processing
Effective tax administration - Collection of the full amount of unpaid tax liability would cause the taxpayer economic hardship or based upon other compelling public policy or equity considerations
There are two types of effective tax administration offers: those based on economic hardship and those based upon equity or public policy.
An effective tax administration offer based upon hardship may be accepted if the IRS determines that, although collection of the full liability could be achieved, it would cause the taxpayer economic hardship. Economic hardship exists when payment of the tax will cause an individual taxpayer to be unable to pay his reasonable basic living expenses.
Factors that support a determination of economic hardship include:
- Taxpayer is incapable of earning a living because of a long term illness, medical condition or disability and it is reasonably foreseeable that taxpayer's financial resources will be exhausted providing for care and support during the course of the condition;
- Although taxpayer has some monthly income, that income is exhausted each month in providing for the care of dependents with no other means of support; and
- Although taxpayer has some assets, the taxpayer is unable to borrow against the equity in those assets and liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses.
Factors supporting a determination by the IRS that accepting a compromise would undermine compliance by other taxpayers with the tax laws include, but are not limited to:
- whether the taxpayer has a history of noncompliance with the filing and payment requirements of the tax laws;
- whether the taxpayer has taken deliberate actions to avoid the payment of taxes; and
- whether the taxpayer has encouraged others to refuse to comply with the tax laws.
Other factors that may be examined include the cause of delinquency, the length of noncompliance and efforts to resolve the noncompliance. The IRS generally reviews the last three to five years for compliance.
The IRS will not accept an effective tax administration offer in compromise based on public policy or equity considerations when the basis for the offer is that the imposition of a particular tax law provision is unjust or inequitable.
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