IRS Equity Financial Analysis

The Equity Component to the IRS’s financial analysis looks at assets and deducts liabilities on those assets (e.g. a car worth $50,000 with a $20,000 loan remaining is an asset valued only at $30,000 in the eyes of the IRS).

Similarly, while I discuss the Income portion of the IRS’s financial analysis in another article, briefly, if a household brings in $9,000.00 per month in total wages, but has $7,000 in “allowable expenses” (per IRS standards), the IRS will only count $24,000 as income ($2,000 x 12).  

The offer in compromise will be the equity number (assets - liabilities) + yearly income number (income - allowable expenses), which will give you the OIC number. If the tax liability is less than the OIC number, then an offer in compromise will not be an available option to that particular taxpayer.

Any time the IRS is considering an Offer in Compromise or IRS Installment Agreement, the IRS will collect financial information statements to determine their ability to pay - all involving IRS Form 433-A (OIC for individuals) and 433-B (OIC for businesses) (for Offers in Compromise) and 433-A, and 433-B and F for other IRS reductions or payment plans.

These forms are signed under penalty of perjury. If the taxpayer tries to hide assets, the IRS can (and have) come back and charge them with perjury. Bottom line - don’t lie to the IRS. There are plenty of ways to get reductions in your tax burden or to pay them off over a manageable period of time.

These are the forms the IRS will use to collect financial information from the taxpayer.

IRS Form 433-F is the Collections Information Statement “short form”, which is an abbreviated form that has the information ACS (automated collections services) looks for when evaluating proposals for setting up a payment plan.  

Form 433-A is required paperwork for not only offers in compromise, but also certain installment agreements, CNC (to be deemed “currently non-collectible”) and for Partial Payment Installment Agreements (or PPIAs) as the 433A shows what you can actually afford to pay.

Doubt as to Collectibility (DATC) requires a 433-A OIC.

Effective Tax Administration (ETA) requires a 433-A OIC

On these IRS forms, the taxpayer must (again, under penalty of perjury), list:

  1. All real estate properties. Look at the quick sale value (80% of fair market value) or the forced sale value (if IRS is going to seize the property, which rarely happens, the calculation is 60% of the fair market value of the real estate).
  2. Get FMV by looking at county real estate assessment.
  3. IRS uses (can also get an appraisal to compete with this assessment and refute their numbers)
  4. Can also include special considerations such as large anticipated repairs/problems.
  5. Also, deduct 100% of the mortgage remaining on the property. If the house is valued at $350,000 and there is $250,000 left on the mortgage, than quick sale value is only $80,000 (10% of the $100,000 left in equity).
  6. Alos deduct the expenses associated with the sale (realtor commission, closing costs, lawyers fees, property taxes owed, etc…)

Exempt Personal Property (for Non OIC forms….since OIC forms don’t even ask for value of furniture and personal effects)

  • Exempt furniture and personal effects - up to $9,120.00 (as of 2017, this number is adjusted yearly) or 80% of $11,400.
  • Exempt tools of the trade - $4,560 (80% of $5,700)
  • Consider special collections (stamps, antiques, cars….not exempt and must be disclosed and assessed at quick sale value (80% of FMV).
  • Typically, engagement rings are not counted.

How the IRS Values Non-Income Producing Assets

Look out for items that are not sellable. If you have a machine that produces something that is obsolete, it may not be able to be sold and therefore would have a realistic zero value to it. Deduct costs of dismantling, removing, moving and reinstalling.

How the IRS Values Income-Producing Assets

If an asset is producing a stream of income consistent with its fair market value. The IRS only counts the income, not the value of the asset.

How the IRS looks at cash in the bank

The offer in compromise rule is that $1,000.00 in cash is exempt + cost of allowable living expenses in the bank is also exempt.

How the IRS looks at cars.

The offer in compromise rule: $3,450.00 in equity is exempt. So if car is worth $15,000.00 and is encumbered by a $12,000.00 loan, you wouldn’t count any portion of it as an asset. If married taxpayers are seeking an offer in compromise, they can apply the IRS car equity rule to two cars.

Three Types of IRS Offers

  1. Doubt as to Collectibility
  2. Doubt as to Liability
  3. Effective Tax Administration

An offer in compromise for a business requires filing IRS Form 433-B (OIC). If this involves payroll taxes, a penalty must be assessed against the responsible individuals as a condition precedent.

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