IRS Income Financial Analysis
The Income Component to the IRS’s financial analysis of taxpayers uses the same forms as the IRS Equity Asset analysis: 433-A, 433-A (OIC), 433-B, 433-B (OIC) and 433-F.
The IRS Income Analysis looks at Gross Wages (both spouses), and will deduct IRS allowable expenses. The result is called “Excess Income”
Excess Income is then multiplied by 12. The resulting figure is added to the IRS equity / asset test to get the number the IRS will accept as an Offer in Compromise. If the taxpayer owes more than the resulting number, the offer in compromise is a worthwhile endeavor. If the taxpayer owes less than the resulting number, the OIC will not be a useful tool and another IRS tax defense strategy will need to be explored by your IRS lawyer.
Gross Wages means wages before any deductions (e.g. social security and 401k contributions). Social security income, alimony and child support are counted as well.
What are IRS Allowable Expenses
Allowable expenses consist of: National Standard Expenses, Medical Standard Expenses, and Local Standards.
IRS National Standard Expenses
Based on family-size alone, the taxpayer will be able to deduce the IRS national standard expense from their gross income.
The IRS national standard expenses are broken down into different components consisting of: food, household expenses, apparel and services, personal care products and misc.
Sometimes you can get more than the national standard allowances for special circumstances. For example, if an allergy or medical condition requires a very specific diet, which causes the cost of food to be higher than what the IRS national standard allowance allows, then this can be taken in to consideration. The burden of proof, of course, rests on the taxpayer to prove that the food portion of the national standard needs to be changed (i.e. grocery receipts) .
IRS Medical Standard Expenses
This is also a national standard expense for Medicals. There is no documentation required to get a medical standard expense deduction for $49.00/month (if under 65) and $117.00/mo (for 65+) as of October 2017.
If a taxpayer under age 65, is spending on average $150.00 per month on health insurance and co-pays, can amend its portion to the standards as well.
Extraordinary conditions may be included as allowable deductions depending on unique circumstances.
IRS EXCEPTION: You can present evidence to justify medically-necessary expenses (not elective procedures) to get beyond the standard IRS medical expenses allowed.
IRS Allowable Local Standard Expenses
IRS allows local housing, utilities and transportation expenses to differ depending on where the taxpayer lives. The taxpayer has to use the IRS provided local standard expenses chart (or the actual living expenses), whichever is lower. For example, if the IRS allowable local rent expense allowed is $1,500 and your rent is only $900.00, you can only use the $900 in the income component of the IRS financial analysis for offers in compromise.
IRS EXCEPTION: the taxpayer can present excess expenses if justifiable. For example, if rent is $2,000.00, but the local rent expense only allows $1,500.00 and, the lease has three months left until termination - might be able to let the IRS allow you to count $2,000.00 for the next three months only (then would have to find cheaper living arrangements and be limited to what the IRS allowable expenses chart allows).
IRS local housing and utility allowable expenses include line items for: mortgage/rent, property taxes, insurance, repairs, maintenance, electric/water, garbage, home phone and cell phone.
Other Allowable Expenses that the IRS MAY allow:
Beyond the national and local standards, the IRS case workers are not completely unreasonable. There may be expenses beyond those listed that they will allow to be deducted, if your IRS tax lawyer can present the expenses as a logical and rational necessity, as long as they are actually being paid.
Examples of IRS allowable expenses that are arguably “necessary for family health and welfare” or “necessary for the production of income” (which are the standards that the IRS will be judging these request by) may include:
- Child care / dependent expenses (e.g. a single mother needs to hire a nanny so she can work, not so she can go out drinking on a saturday night)
- Health care expenses
- Life / Disability Insurance expenses
- Court ordered payments
- Secured debts
- Accounting / legal expenses
- Additional expenses needed for those with special needs or disabilities.
- Union dues. Especially if the job is dependent upon the employee being a member of a union.
- Paying taxes. Obviously, the IRS will let you pay your income taxes so you don’t continue to fall into arrears.
Reasonable Collection Potential (RCP)
When a taxpayer owes the IRS money, the IRS is analyzing what they think they can collect. The IRS calls this the Reasonable Collection Potential (RCP) - which delves into what they can collect from the taxpayer’s personal assets, business assets, personal monthly income and business monthly income.
After the IRS looks at all the RCP components, deducts exempt personal assets, and adds the up, they determine the taxpayer’s RCP - or what they can expect to get from the taxpayer.
Calculating Reasonable Collection Potential (RCP) for Personal Assets
Take the FMV of all assets (excluding exempt property) x 80% (or quick sale value, if seizure imminent). Then subtract any debts owed on each asset. Then subtract liquidation related taxes and expenses. The result is the taxpayer’s RCP from assets.
Calculating Reasonable Collection Potential (RCP) for Business Assets
Take FMV of all assets (excluding assets that are income producing) x 80% or QSV. Subtract debt on each asset and cost of liquidation/liquidation related taxes). The result is the taxpayer’s business asset RCP.
Calculating Reasonable Collection Potential (RCP) for Business Income
Take the monthly income listed from 433-B and subtract from monthly expenses from IRS Form 433-B. Then make adjustments for depreciation, secured loan payments. This is the amount that will be made available to the IRS and should be entered onto IRS Form 433-A.
IRS Exempt Personal Assets
$1,000.00 in cash + cash needed to meet basic living costs for one month. IRS takes the position that taxpayers should have one month’s worth of living expenses in reserve.
Vehicle equity up to: $______ (number changes periodically)
Income-Producing Property (asset is excluded).
IRS Lawyer Resources