(1) This transmits a revision for IRM 5.8.5, Offer in Compromise, Financial Analysis.
(1) The following subsections were revised:
IRM Reference | Summary of Changes |
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5.8.5.1.7 | Added reference to IRM 5.15.1, Financial Analysis Handbook. |
5.8.5.2(2) | Modified language to include equity in assets when determining full pay potential. |
5.8.5.2(3) | Added paragraph (3) to request withdrawal if taxpayer has ability to full pay. Renumbered existing (3) to (4). |
5.8.5.3(2), 5.8.5.3.1.4(1), 5.8.5.20(6), 5.8.5.24(3). | Incorporated IGM SBSE-05-0823-0047, Interim Guidance on Secure Messaging for SCOIC Employees, dated 08-03-2023. |
5.8.5.2(4) | Renumbered from (3), added language to consider equity in assets. |
5.8.5.3(4) | Clarified language about disclosure to taxpayers living in separate households. |
5.8.5.3.1.1(2) | Incorporated IGM SBSE-05-0223-0001, Interim Guidance on OIC-IAT Usage in the Offer in Compromise Process, dated 02-28-2023, to (2). Renumbered existing (2) to (3). |
5.8.5.3.1.1(3) | Modified language to utilize appropriate sources to verify the CIS and document the results of investigation in the case history. |
5.8.5.3.1.1(3) Table | Added use information to RTVUE/BRTVUE and IRPTRO. |
5.8.5.3.1.1(3) Table | Clarified requirement for securing an RAR. |
5.8.5.3.1.1(3) Table | Moved reference to Accurint and modified description. |
5.8.5.3.1.1(3) Table | Added Online Real Estate Sources, e.g., Zillow, Redfin for FMV research. |
5.8.5.3.1.1(3) Table | Added Internet Sources as a research source. |
5.8.5.3.1.1(3) Note | Added note to clarify when to research credit bureau, FATCA, and CKGE research. |
5.8.5.3.1.1(5) | Added clarification to copy/paste research information into case history if appropriate and to document results of analysis in case history. |
5.8.5.3.1.2(6) | Clarified language for documenting the case history with results of credit bureau research. |
5.8.5.3.1.4(2) Table | Added language to review bank deposits or transfers out for undisclosed accounts or income sources. |
5.8.5.4.1(2) | Added reference to Fast Track Mediation. |
5.8.5.5(1) | Added paragraph to calculate one RCP for married taxpayers with separate offers. |
5.8.5.5(2) | Renumbered from (1). Modified language about allocation of RCP between separate offers. |
5.8.5.5(3) | Added paragraph to allocate RCP based on the percentage share of liability and to not exceed the liability owed on either offer. Added example. |
5.8.5.5(3) | Moved note in (1) to new (3) and modified examples to clarify when it may be appropriate to allocate equity or FIV to separate offers. |
5.8.5.6(4) | Modified language about assigning a value to transferred assets. |
5.8.5.6(6) | Modified rejection language based on assets or income not related to transferred property, nominee, or alter-ego. |
5.8.5.7(1) | Clarified note not to reduce cash by $1000 if the taxpayer can full pay. Deleted exception. |
5.8.5.7(3) | Added note and example to clarify when it may be appropriate to reduce the amount of cash by allowable expenses. |
5.8.5.7(6) | Added paragraph to include cash held in peer to peer payment or online gambling applications to the AET. Renumbered (7) through (10). |
5.8.5.7(8) and (9) | Deleted reference to offer deposits. |
5.8.5.7.1(2) | Deleted references to offer deposits. |
5.8.5.8 | Renamed to Securities, Closely Held Stock, and Business Interests. |
5.8.5.8(3) | Clarified language for valuing publicly traded stocks. |
5.8.5.8(4) | Added new paragraph for valuing publicly traded bonds. |
5.8.5.8(5) | Added new paragraph for determining the value of closely held stock or interests in a business, added an example. |
5.8.5.8(7) | Modified language in first bullet on when to use ALEs in determining excessive officer compensation. Added bullet to address undistributed K-1 income. |
5.8.5.8(7) | Deleted paragraph referencing virtual currency. |
5.8.5.8.1 | Added new subsection Digital Assets. |
5.8.5.9(3) Table | Modified note to define selling a life insurance policy as a Life Settlement or Viatical Settlement. Updated guidance and examples on valuing a life insurance policy. |
5.8.5.10(4) | Added language to consider large contributions to retirement plans as a dissipated asset. |
5.8.5.12 | Modified language in the note regarding the determination if a taxpayer can full pay. |
5.8.5.13(2) | Added note to consider multiple verification sources when valuing real property. Added example. |
5.8.5.13(5) | Added language to note about applying ETA or DATCSC to real property. |
5.8.5.13(5) | Added an example to consider a reverse mortgage when applying ETA or DATSC criteria to real property. Modified language in existing example and added potential CNC alternative. |
5.8.5.20(2) | Added reference to IRM 5.15.1.12 |
5.8.5.20(6) | Added example (4) for when to include the monthly cash advance from a reverse mortgage in income. |
5.8.5.22.3(3) | Deleted reference to retired debt. |
5.8.5.22.3(6) | Increased the age and mileage thresholds for additional vehicle operating expense. |
5.8.5.24(3) | Added reference to 5.8.5.5 in table when allocating RCP. |
5.8.5.26(3) | Added language on the treatment of cash expenditures in the ongoing operations of a business. |
5.8.5.29 (2) & (3) | Modified language in (2) to refer to CSED extensions by waiver and deleted paragraph (3). |
5.8.5 | Editorial changes made throughout. |
(2) Reviewed and updated website addresses, legal references and IRM references, as necessary.
This IRM supersedes IRM 5.8.5 dated 9/24/2021. Incorporates IGM SBSE-05-0223-0001, Interim Guidance on OIC-IAT Usage in the Offer in Compromise Process, dated 02-28-2023 and IGM SBSE-05-0823-0047, Interim Guidance on Secure Messaging for SCOIC Employees, dated 08-03-2023.
SBSE Collection Offer Examiners, Offer Specialists, and other IRS employees who conduct investigations of a taxpayer’s offer in compromise.
Rocco A. Steco
Director, Collection Policy
Acronym | Definition |
---|---|
ACS | Automated Collection System |
AET | Asset Equity Table |
AOIC | Automated Offer in Compromise |
ATAT | Abusive Tax Avoidance Transaction |
APS | Account and Processing Support |
ASTARS(OCI) | Abusive Schemes Tracking and Reporting System (Offshore Compliance Initiative) |
CAU | Caution Indicator |
CDP | Collection Due Process |
CFFC | Collection Functional Fraud Coordinator |
CIS | Collection Information Statement |
CKGE | Compliance Data Warehouse Knowledge Graph Environment |
COIC | Centralized Offer in Compromise |
CSED | Collection Statute Expiration Date |
DATC | Doubt as to Collectibility |
DATCSC | Doubt as to Collectibility with Special Circumstances |
DATL | Doubt as to Liability |
DP | Decision Point Tool on AOIC |
DPC | Designated Payment Code |
DVDP | Domestic Voluntary Disclosure Program |
EH | Equivalent Hearing |
ES | Estimated Tax Payment |
ETA | Effective Tax Administration |
FATCA | Foreign Account Tax Compliance Act |
FTA | Fraud Technical Advisor |
FMV | Fair Market Value |
FOIC | Field Offer in Compromise |
FTD | Federal Tax Deposit |
IAT | Integrated Automation Technologies |
ICS | Integrated Collection System |
IET | Income Expense Table |
IRC | Internal Revenue Code |
IRM | Internal Revenue Manual |
LLC | Limited Liability Company |
MFT | Master File Transaction |
MOIC | Monitoring Offer in Compromise |
NFTL | Notice of Federal Tax Lien |
NIBIG | Not in the Best Interest of the Government |
NRE | Net Realizable Equity |
OE | Offer examiner |
OI | Other Investigation |
OIC | Offer in Compromise |
OS | Offer specialist |
OVDP | Offshore Voluntary Disclosure Program |
PDT | Potentially Dangerous Taxpayer |
PPIA | Partial Payment Installment Agreement |
QSV | Quick Sale Value |
RAR | Revenue Agent Report |
RCP | Reasonable Collection Potential |
RO | Revenue Officer |
SERP | Servicewide Electronic Research Program |
TIPRA | Tax Increase Prevention and Reconciliation Act of 2005 |
TFRP | Trust Fund Recovery Penalty |
The OE/OS must not reduce the liability due at the time of offer submission by the initial offer payment or any periodic payments received during the offer investigation when determining ability to full pay. A reduction of the liability based on a refund offset or other type of payment, i.e. levy proceeds, is appropriate.
If the taxpayer indicates special circumstances or effective tax administration criteria may apply, continue the offer investigation without completing the initial calculation to determine if the taxpayer can full pay via an installment agreement or liquidation of assets.
5.8.5.3 (09-24-2021)If taxpayers are submitting a joint offer and do not reside in the same household, separate Forms 433-A/B(OIC) are required.
5.8.5.3.1 (09-24-2021)If the taxpayer does not provide documents required in the Form 656 instructions with the offer submission, in most instances a request will be made for those documents as they are deemed necessary to verify taxpayer’s income, expenses, and/or asset ownership. See IRM 5.8.5.3.1.4 , Verification through Taxpayer Contact
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 will not be re-investigated. The OE or OS will use the RO's determinations included in ICS to calculate the RCP. However, any differences between the taxpayer’s and the RO's CIS should be resolved by contacting and discussing the differences with the taxpayer, by phone, if possible.
5.8.5.3.1.1 (04-08-2024)Wages reported on tax returns may not equal the taxpayer’s gross wage income because of certain allowable deferred income items or deductions. Compare wage income to what is reported on Form W-2 and use gross wage income for IET purposes.
Certain income is not reported via Form 1099 unless a specific dollar amount or number of transactions are met. The OE/OS must question the taxpayer when the potential exists they receive income from the gig economy (also called sharing or access economy in which on demand work/services are provided). In these instances, question the taxpayer about additional income sources. These questions are necessary in certain situations such as when the CIS includes expenses which exceed income by a considerable amount or taxpayer does not have a bank account and uses digital payment network e.g. Paypal, Zelle, Venmo, etc.
The date the image was added to Google Maps should be noted to determine if is still an accurate picture.
Although Credit Bureau Reports, CKGE, and FATCA are required if specific thresholds are met prior to accepting an offer, they may be researched regardless of the amount owed and before an acceptance determination is made. The OE/OS should consider researching these sources at the beginning of the investigation to address any discrepancies with the taxpayer following their initial analysis.
5.8.5.3.1.2 (04-08-2024)If the taxpayer and taxpayer spouse sign an original offer that includes joint and separate periods, the credit bureau report can be secured on both parties since there are joint liabilities on the form 656.
Any request for information from the taxpayer that is available via internal sources must include documentation in the AOIC/ICS history with the reason for the request.
In certain instances, more specific information may be required from the taxpayer including accounts receivable listings, commission statements, etc.
Only consider requesting specific cancelled checks and deposit items if questionable items cannot be adequately explained. See IRM 5.8.5.7 , Cash.
If regular deposits are identified from peer to peer payment application sources consider requesting activity statements to verify potential income sources.
If a copy of the court order is not provided and/or the payment cannot be verified, the payment will be disallowed as an expense.
5.8.5.4 (09-24-2021)If after discussion with field RO group manager, it is determined a field call cannot be made in a reasonable period of time, due to the taxpayer's geographic location or staffing issues, the ICS history will be documented and the offer acceptance recommendation, if appropriate, may be submitted for approval.
If the offer is being rejected or withdrawn based on the equity in an asset which the taxpayer is not able to liquidate or borrow against, the OE/OS must determine an appropriate resolution to the taxpayer's account. Refer to IRM 5.8.7.10, Alternative Resolutions.
5.8.5.4.1 (04-08-2024)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 the 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 valuation is being used in the calculation of RCP. Fast Track Mediation is an avenue that may be pursued to resolve a dispute over the calculation of RCP, see IRM 5.8.7.6, Fast Track Mediation for Offer in Compromise.
5.8.5.5 (04-08-2024)If… | Then… |
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Both spouses have an equal interest in all assets | Allocate equity equally between both offers. |
One spouse owns a separate asset | Allocate equity in the separate asset to the offer of the spouse who owns the asset. |
Both spouses have an interest in the same property but their interest is not equally divided | Allocate the equity based on each spouse’s interest in 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. |
John and Mary owe $100,000 in joint Form 1040 liabilities and John owes a TFRP for $5,000. John submits an offer for the TFRP and joint liabilities and Mary files a separate offer for the joint liabilities. They each offered $1,000. Their RCP is determined to be $50,000 with their jointly owned personal residence being the primary asset. John submits an amended offer for $49,000 and Mary’s offer remains the same. While the two offers would equal the RCP of $50,000 the OE correctly advised the taxpayers the offer terms will be split equally based on the proportionate share of assets and liability.
The allocation of equity in assets and future income value (FIV) should be based on the taxpayer’s interest in property and share of FIV. In some circumstances, it may be beneficial to the taxpayer and the government to allocate in a different manner.
John and Mary owe $75,000 in joint Form 1040 liabilities and John owes a TFRP for $20,000. John and Mary submit two offers, one for John’s TFRP and the joint liabilities and the other for Mary’s joint liabilities. The equity in John and Mary’s assets equal $30,000. Since the equity in assets ($30K) is greater than the balance of the TFRP owed by John ($20K) it may be beneficial to both parties for the taxpayers to full pay John’s TFRP and then submit one joint offer with a recalculated RCP of $10,000 ($30k - $20k) to compromise the joint liabilities. . Both John and Mary would need to agree that paying John’s TFRP would be beneficial to both of them, otherwise the equity in assets will be allocated based on each taxpayer’s ownership interest in the assets.
Same situation as above except John owes $100,000 for separate TFRP liabilities. John is employed but Mary does not work. The equity in joint assets equal $30,000 and the FIV of John’s income is $10,000. In this instance, the OE/OS should allocate all the $10,000 FIV to John’s offer and include $15,000 of the equity in joint assets (50% of $30k) for a total offer of $25,000 ($10,000 FIV + $15,000 equity) for John and allocate the remaining $15,000 equity in assets to Mary’s offer.
Review Form 433-A(OIC) to determine if the taxpayer has previously resided in a community property state. Property acquired in a community property state may impact the calculation of RCP. Refer to State Law Guides at Law Guides (treas.gov) and community property information available in IRM 25.18.4, Collection of Taxes in Community Property States.
5.8.5.6 (03-23-2018)If any transferee, nominee, or alter ego issues are present and the offer is being recommended for acceptance, an opinion from Counsel may be secured relative to the appropriateness of adding the taxpayer’s interest in an asset or other income in the acceptable offer amount. If an opinion is not requested prior to the acceptance recommendation being forwarded for Counsel review, the narrative report must clearly outline the issues identified and if the offer includes any amount in RCP to account for the value of the assets or income in which transferee, nominee, or alter ego issues are present.
5.8.5.7 (04-08-2024)If a determination is made that the taxpayer can full pay the liabilities from equity in assets, an installment agreement, or a combination of both do not reduce the amount of cash by $1,000.
If the ending balances in an individual taxpayer’s checking account fluctuate greatly or if you otherwise have reason to believe the amount over $1,000 will be needed to pay for monthly allowable expenses, do not include it on the AET. If the taxpayer consistently maintains a balance of cash in their checking account after the payment of expenses then do not reduce the amount over $1,000 by the allowable expenses.
(1) The taxpayer lists $10,000 in a checking account on Form 433-A (OIC) and the ending balance in their account fluctuated between $6,000 and $10,000 on the statements reviewed. The taxpayer’s allowable living expenses are $3,000. Include $6,000 ($10,000 less $1,000 less $3,000) as an asset value on the AET.
(2) The taxpayer lists $3,000 in a checking account on the Form 433-A (OIC) and the ending balance in their account fluctuated between $1000 and $3,000 on the statements reviewed. The taxpayer’s allowable living expenses are $2,700. Do not include any amount on the AET since the $300 difference ($3,000 less $2,700) is less than $1000.
(3) The taxpayer lists $2,500 in a checking account on the Form 433-A (OIC). Review of the bank statements verifies the taxpayer is paying their expenses monthly and the ending balance in the account is consistently around $2,500. The taxpayer’s allowable living expenses are $2,700. Do not reduce the amount of cash by the allowable expenses since the taxpayer is able to pay their expenses and maintain a consistent $2,500 balance of cash in their account. Include $1,500 ($2,500 less $1,000) on the AET.
Use business appraisals only when the cost of the appraisal is justified by the complexity of the business activity.
Taxpayer is a 50% shareholder in a Subchapter S Corporation that owns commercial property. The only asset of the Subchapter S Corporation is the real property. The property has a FMV of $500,000 and there are no encumbrances. The NRE of the property is equal to the QSV of the property or $400,000 (80% of $500,000). The value of the taxpayer’s shareholder interest is 50% of the $400,000 NRE or $200,000.
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 5.8.4.21, Responsibility of Offer Examiners, Offer Specialists, and Field Revenue Officers.
Restricted use virtual currency (such as frequent flyer miles or currency for use in specific online gaming platforms) has limited to no value in the real economy and will not be added to RCP.
If… | Then… |
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The taxpayer will retain the policy | Equity is the cash surrender value. |
The taxpayer will sell the policy to help fund the offer | Equity is the amount the taxpayer will receive from the sale of the policy. Documentation from the broker may be required to verify the selling price and related expenses. |
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 5.8.5.23 , Conditional Expenses, for allowance of the payment. |
The taxpayer has a life insurance policy (term or whole life) which if sold would not cause a financial hardship |
A taxpayer may sell their life insurance policy to a third party who will take over the monthly premium and become the beneficiary to the policy. The sale of a life insurance policy may be through a "life settlement" or a "viatical settlement."
When questions arise about the value of the policy, you may request that the taxpayer secure an estimate of the policy’s value from a life or viatical settlement provider. The taxpayer is not required to sell the policy, but the IRS must assign a value to a life insurance policy that may be sold.
If the taxpayer demonstrates the proceeds of the policy will be required to meet the needs of their beneficiaries, it may be appropriate to apply ETA or Doubt as to Collectibility with Special Circumstance (DATCSC) guidelines when considering the offer.
Taxpayer is 75 years old and has a life insurance policy with a face value of $100k. The taxpayer has no identified health issues. The value of the policy is determined to be $10,000 (10% of $100k). $8,000 (QSV) will be added as the NRE to the AET.
Taxpayer is 65 years old and has a life insurance policy with a face value of $100k. The taxpayer has been diagnosed with a terminal condition and has a life expectancy of less than two years. In a viatical settlement the policy is determined to have a value of $50,000 (50% of $100K). $40,000 (QSV) will be added as the NRE to the AET. However, the taxpayer demonstrates the proceeds of the policy will be needed by the non-liable spouse to meet their necessary expenses in the future. The offer may be acceptable under ETA or DATCSC criteria if the amount of the offer is less than the value of a viatical settlement.
If the taxpayer has a whole life policy, then a reasonable amount of the premiums may be allowed which is attributable to the death benefit of the policy. This will be determined by reviewing the policy statement.
The taxpayer lists an expense for life insurance on their CIS in the amount of $250. It is determined this expense is for the cost of a whole life policy. Reviewing the policy statement shows the cost associated with the death benefit is $100 and the balance accumulates as an investment. The IET will reflect the $100 cost associated with the death benefit.
5.8.5.10 (04-08-2024)If the taxpayer made significant voluntary contributions to a retirement plan after the tax was assessed or within three years prior to submitting the offer and has no ability to access the funds, then it may be appropriate to include those contributions in the reasonable collection potential (RCP) as a dissipated asset. See IRM 5.8.5.18.
In 2020 and 2021 the taxpayer made voluntary contributions of $19,500.00 per year to their 401(k) plan. In March of 2022 they submit an offer of $5,000. Although they cannot access the plan or borrow from it the cumulative $39,000 in contributions may be included in the RCP as a dissipated asset.
5.8.5.11 (03-23-2018)If… | Then… |
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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 a valid encumbrance with priority over the NFTL | Allow the encumbrance in addition to the statutory exemption. |
If a determination is made that the IMF taxpayer can full pay the liabilities from equity in assets, an installment agreement, or a combination of both, do not reduce the QSV of vehicles by $3,450.
5.8.5.13 (04-08-2024)In most instances it will be necessary to compare the value of a property from multiple sources to determine an accurate FMV. The OE/OS should avoid using any one source alone when determining the FMV of a property.
A taxpayer lists the FMV of their personal residence to be $250,000 on the CIS and provides a recent tax assessment statement showing an assessed value of $250,000. The OE/OS researches comparable sales of properties located in the taxpayer’s township and finds the average selling price of properties with similar $250,000 tax assessments to be $400,000. Zillow estimates the value of the property to be $410,000. It is reasonable to use $400,000 as the FMV of the taxpayer’s property since multiple sources suggest that is more accurate than the value listed on the tax assessment statement which is typically lower than the actual FMV of a property.
If internal research does not provide an accurate valuation, the OE/OS may request additional documentation including:
Additional documentation from the taxpayer should only be requested based on the facts and circumstances of the case.
While the equity in real property must be included in RCP to make a determination whether the offer is acceptable based on DATC, the OE/OS must be aware of circumstances in which an offer under ETA or Doubt as to Collectibility with Special Circumstances (DATCSC) may be appropriate for an amount which does not include some or all of the real property equity. An inability to borrow against the property itself is not a sufficient reason for accepting the offer under ETA or DATCSC criteria, see IRM 5.8.11.6(5).
A taxpayer has equity in their residence of $20,000. The value of the property approximates the median sales price of the local community and the taxpayer is unable to borrow against the property. If the property is sold, the taxpayer’s move may cause the family a hardship, since one of taxpayer’s children would not be able to stay enrolled in a program which accommodates their disability and their new school does not have a similar program. Refer to IRM 5.8.11, Effective Tax Administration and determine whether acceptance under ETA or DATCSC is an appropriate resolution.
A taxpayer has equity in their residence of approximately $8,000 and is unable to borrow against the property. If the taxpayer sells their property the reasonable costs of moving would exceed the equity from the sale of the property. In this instance, it may be appropriate to allow for the taxpayer’s offer to be accepted under ETA or DATCSC since it may create a hardship to taxpayer if the taxpayer were required to move. Refer to IRM 5.8.11, Effective Tax Administration and determine whether acceptance under ETA or DATCSC is an appropriate resolution.
A taxpayer has equity in their residence of $100,000 but is unable to secure a conventional loan against the property. Because of their age and amount of equity in the home the taxpayer may qualify for a reverse mortgage that would provide for payment through an installment agreement. In this case it may be appropriate to reject the offer and pursue an installment agreement.
A taxpayer has equity in their residence of approximately $100,000 and is unable to borrow against the property or make payments through an installment agreement. In this case, the appropriate resolution may be to request a withdrawal or reject the taxpayer’s offer based on RCP, recommend a currently not collectible alternative, and file a NFTL. See IRM 5.8.5.4
When the property does not appear to have been transferred into the tenancy to avoid the tax collection, a determination may be made to reduce the taxpayer’s NRE to less than 50 percent based on the difficulty in liquidating or borrowing against the taxpayer’s share of the asset.
5.8.5.14 (03-23-2018)In instances which the taxpayer’s business is solely rental property and produces income for the taxpayer, the equity may be excluded from RCP if the FIV inclusive of taxpayer’s income from the property is higher than the equity in the property. If a determination is made to include the real property equity in RCP, then generally, net revenue from the property will not be included in FIV. An adjustment to the taxpayer's future income value may also be appropriate, if the taxpayer will be borrowing against or selling the property to fund the offer. The following examples provide some guidance in evaluating equity and income produced by assets:
(1) A business depends on a machine to manufacture parts and cannot operate without this machine. The equity is $100,000. The machine produces net income of $5,000 monthly. The RCP will include the income produced by the machine, but not the equity. Equity in this machine will generally not be included in the RCP because the machine is needed to produce the income, and is essential to the ability of the business to continue to operate.
(2) The same business in the prior example, but the business can continue to operate without the machine, i.e. the equipment is not used in the process of generating the key product of the business. The machine generates only $500 net monthly income. Consider including the equity in the RCP and remove $500 from the business income
(3) A trucking company has ten trucks. Eight are fully encumbered and two trucks have no encumbrances and $30,000 in equity. The two trucks combined generate net income of $12,000 per year. The net income from the trucks is included in the calculation of Future Income Value. The equity in the trucks will not be included in RCP.
(4) The same trucks described in the previous example generate only $1000 per year in net income, but have $30,000 in equity. If the business can successfully operate without the two trucks, consider removing the income from the RCP and including the equity in the RCP.
(5) A BMF in-business taxpayer owns real property with net equity of $50,000. Include the equity in the real property in RCP, yet the taxpayer's net income must be adjusted for the loss of any rent payments they are receiving if the property is sold.
(6) The taxpayer has real property with equity of $50,000 that is rented to a third party and will borrow $40,000 against the equity to fund the offer. The property generates $1,500 of net income each month and the loan will require payments of $1,000 per month. In this instance, the OE/OS will include in the calculation of RCP, the $50,000 equity in the real property, plus the remaining $500 (after allowing for the loan repayment) per month for the number of months based on the terms of the offer.
A taxpayer operates a construction company, as a Sub S corporation, in which their wages from the corporation are $ 60,000 per year. The taxpayer's future income value of $12,000 is based on net income of $1000 per month for 12 months (cash offer). The taxpayer's interest in the corporate assets is equal to $20,000. It is determined all assets are required for the production of income by the corporation. Since the taxpayer shows a net income from the business, the exclusion of income producing assets may be appropriate in this instance.
The same scenario as the previous example, yet the taxpayer does not draw a salary and the corporation shows a loss from the Sub S. Since the corporation is not generating any income for the taxpayer, the taxpayer's interest in the corporation must be included in RCP.
5.8.5.16 (09-24-2021)Request business appraisals only 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.
This exemption only applies to tools of the trade for individuals and sole proprietorships. Any property of a LLC, partnership or corporation is not entitled to the exemption.
Whether an automobile is a tool of the trade will depend on the taxpayer’s trade. The levy exemption amount is updated on an annual basis.
5.8.5.17 (03-23-2018)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.
Since the government has the authority to discharge the assets of the taxpayer from the federal tax lien, when an amount not less than the value of the government’s interest in the property is paid in partial satisfaction of the liability, an appropriate method to determine the net equity amount to be included in RCP of a business being valued as a going concern is to evaluate in the same manner as a lien discharge request. This evaluation will take into consideration the fair market value of the business and any encumbrances which have priority over the federal tax lien.
The taxpayer operates a business which has been in existence for a number of years and has a good reputation with current customers. The assets of the business are valued at $150,000, yet are encumbered for $120,000 so it appears there is no equity for purposes of RCP ($150K FMV reduced to QSV of $120K - encumbrance of $120K = 0). An appraisal or internal research has determined the business could be sold as a going concern for at least $200,000. In this circumstance, based on the valuation of the operating business, there is equity of $40,000 ($200K reduced to $160K - $120K = $40K) which must be included in RCP.
The taxpayer operates a business which holds a liquor license which is transferable and valued at $100,000. The net income from the business is $1,000 per month. Include the value of the liquor license in RCP, yet the taxpayer's net income must be adjusted and/or anticipated additional expenses allowed.
5.8.5.18 (09-24-2021)The evaluation of a taxpayer’s interest in property held as a nominee, transferee, or alter ego should be considered separately from the determination the taxpayer may have dissipated an asset in an attempt to avoid the payment of tax. See IRM 5.8.5.6 , Assets Held By Others as Transferees, Nominees, or Alter Egos
It is necessary to determine whether the asset transfer, in the form of a gift, occurred after the statutory lien was established. When an asset is gifted subsequent to the statutory lien which attached to the property, the property must be included in RCP as an asset and not a dissipated asset.
Even if the transfer and/or sale took place more than three years prior to the offer submission, it may be appropriate to include the asset in the calculation of RCP if the asset transfer and/or sale occurred during a period of up to six months prior to or after the assessment of the tax liability. If the transfer took place upon notice of or during an examination, these time frames may not apply based on the circumstances of the case. In any instance where the inclusion of a dissipated asset is being considered, a determination on whether the funds were used for health/welfare of the family or production of income is appropriate
Do not expand the scope of an offer investigation beyond the requirements defined in IRM 5.8.5.4 , Equity in Assets, for the sole purpose of attempting to locate dissipated assets.
A taxpayer is offering $1,000 which represents RCP, yet dissipated an asset with net equity of $50,000. The AET must reflect the calculated RCP and the value of the dissipated asset and the offer will be rejected under NIBIG.
For the value of a dissipated asset to be considered by Appeals, the offer must be rejected under NIBIG and requires second level managerial approval.
Each of the examples in paragraph (5) occurred within three years prior to the offer submission or during the offer investigation, and the taxpayer dissipated the assets after incurring the tax liability, within six months prior to the tax assessment, during an examination, or after receiving notice of an examination.
(1) The taxpayer dissolved an IRA or other investment account to pay for specific non-priority items, i.e. child's wedding, child's university tuition, extravagant vacation, etc.
(2) The taxpayer refinanced their house and used the funds to pay off credit card and non-secured debt. The credit cards were NOT used for payment of necessary living expenses and/or the production of income.
(3) The taxpayer inherited funds and used the funds for non-priority items (other than health/welfare of the family or production of income).
(4) The taxpayer closed bank/investment accounts and will not disclose how the funds were spent or if any funds remain.
(5) A taxpayer filed a CAP to avoid the filing of a NFTL and insisted the lien would impair their credit and ability to successfully operate the business. After the non-filing was granted, the taxpayer fully encumbered their assets, used the funds for non-priority items (items not necessary for the production of income or the health and welfare of the taxpayer and/or their family) and then submitted an OIC.
The taxpayer filed tax returns for five years (2013 - 2017) in February of 2019, which were assessed in March 2019. In January of 2019, the taxpayer transferred real property to a family member for no consideration. An offer was submitted in January 2023. In this instance, since the transfer was within six months of the tax assessments, it may be appropriate to include the value of the real property in RCP.
The taxpayer received notification the IRS was beginning an audit of their 2015 tax return in January of 2017. The taxpayer transferred an investment account to a family member in February 2017. Additional tax liabilities based on the audit were assessed in March 2017. An offer was submitted in March 2021. In this instance, since the transfer took place after notification of the audit, it may be appropriate to include the value of the account in RCP.
(1) 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.
(2) Dissolving an IRA during unemployment or underemployment. 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 to the amount needed to meet allowable expenses in the RCP calculation.
(3) Substantial amount withdrawn from bank accounts. Taxpayer provided supporting documentation that funds were used to pay for medical or other necessary living expenses. This amount will not be included in the RCP calculation
(4) Disposing of an asset and using the funds to purchase another asset that is included in the offer evaluation. Do not include the value of the asset disposed of as a dissipated asset.
The taxpayer received a Form W-2G showing $60,000 gambling winnings. The taxpayer provides verification they incurred losses equal to or greater than this amount. The $60,000 should not be considered a dissipated asset.
The value placed on a dissipated asset must be included on the AET which is provided to the taxpayer with the rejection letter. This is necessary, so the taxpayer has an opportunity to dispute the value and/or inclusion of the asset in any appeal submitted.
5.8.5.19 (09-24-2021)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.
5.8.5.20 (04-08-2024)This may include situations where the taxpayer’s income is recently reduced based on a change in occupation or employment status.
If… | Then… |
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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. Judge each case on its own merit, including consideration of special circumstances or ETA issues. |
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 the taxpayer’s previous annual income or you may use income averaging to accurately determine the taxpayer’s income.
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.
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. Using the taxpayer’s current income with a future income collateral agreement may be appropriate.
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.
The taxpayer is a stock broker whose income in 2018 was $150,000 and income in 2019 was $25,000. In this case, consider income averaging the prior three years or secure a future income collateral agreement if the offer is accepted.
This practice does not apply to wage earners. Wage earners should be based on current income unless the taxpayer has unique circumstances.
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.
(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.
(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 63. 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.
(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.
(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.
(3) The taxpayer was incarcerated and may have been involved in the transfer of assets. If the OE/OS is unable to complete a thorough asset investigation, consideration should be given whether it would be in the best interest of the government to reject the offer and reassign the case to the field for a determination on any hidden assets.
(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.
(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. Generally, do not include the gift amount as income.
(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, consider referring the taxpayer and the business income tax return to Examination.
(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.
(4) The taxpayer has a reverse mortgage that provides for fixed monthly cash advances for as long as they are living in their home. The amount of the cash advance may be added to income if the terms of the loan does not restrict the use of the funds and the advances are expected to continue.
(5) 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 will 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.
The taxpayer receives child support income in the amount of $500 per month, which will only be received for an additional 18 months. An adjustment to the taxpayer’s income will be required when calculating the ability to fully pay the liability under IA guidelines and if the offer was submitted requesting periodic payment terms.
5.8.5.21 (09-30-2013)(1) A taxpayer is currently in medical school; upon graduation income should increase dramatically. Consider securing a future income collateral agreement.
(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.
(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.
(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, reject the offer.
5.8.5.22 (10-22-2010)National Standard Expense amount is $1,100. The taxpayer’s actual expenditures are: housekeeping supplies - $100, clothing - $100, food - $700, personal care products - $100, and miscellaneous - $200 (Total Expenses - $1,200). The taxpayer is allowed the national standard amount of $1,100, unless the higher amount is justified as necessary. In this example the taxpayer has claimed a higher food expense than allowed. Justification would be based on prescribed or required dietary needs. The taxpayer must substantiate and verify only the food expense. The taxpayer is not required to verify expenses for all five categories if a higher expense is claimed for one category. The standard amounts will be allowed for the remaining categories.
The taxpayer is living in a home with a $2,250 monthly housing expense, including utilities. The present fair market value of the house is approximately equal to the mortgage balance. The local standard allowance is $1,800 per month. If the taxpayer remains in the home, income and expenses are approximately equal, leaving no disposable income in the calculation of future income value. If the taxpayer is unable to restructure their mortgage payment and the equity in the property is insufficient to pay the costs of selling their current home, related moving expenses, and purchasing or renting a new home that would allow for monthly payments within the national standard, the taxpayer may be allowed a housing amount that exceeds the standard.