Financial
Analysis Handbook
 
5.15.1 Financial Analysis Handbook
5.15.1.1 (05-01-2004)
Expectations
1.
This
chapter provides instructions for analyzing the
taxpayer's financial condition.
2.
An
interview should be conducted in order to determine
the appropriate case resolution. Complete income and
expense analysis is necessary only if the taxpayer
does not full pay, however secure a complete
Collection Information Statement upon initial
contact.
3.
The
analysis of a taxpayer's financial condition
provides a basis to make one or more of the
following decisions:
A.
Request
payment in full or in part from available assets
B.
File a
Notice of Federal Tax Lien (
IRM
5.12)
C.
Initiate
enforcement action if assets are available to pay
the liability and the taxpayer is unwilling to
voluntarily convert assets to cash (
IRM
5.10)
D.
Enter into
an Installment Agreement (
IRM
5.14)
E.
Explain the
Offer in Compromise provisions (
IRM
5.8)
F.
Report the
account Currently not Collectible (
IRM
5.16)
4.
The
taxpayer's financial information may be secured on:
A.
Form 433-A,
Collection Information Statement (CIS) for
Wage-earners and Self-employed Individuals
B.
Form 433-B,
Collection Information Statement for Businesses
C.
Form 433-F,
Collection Information Statement - Used by the
Automated Collection System (
ACS
) and the campuses for individuals owing less than
$100,000.
D.
A business
taxpayer's own financial statement (income statement
and balance sheet) can be used as a substitute for
the income and expense section of the Form 433-B.
5.
National
and local standards are guidelines established by
the Service to provide consistency in certain
expense allowances such as groceries and household
expenses, housing and transportation. Reference to
these standards will be found throughout this
section. Exhibit 5.15.1-2 provide instructions for
on-line access to the actual standards for the
income levels and locales.
6.
The
standard amounts set forth in the national and local
guidelines are designed to account for basic living
expenses. In some cases, based on a taxpayer's
individual fact's and circumstances, it may be
appropriate to deviate from the standard amount when
failure to do so will cause the taxpayer economic
hardship. The taxpayer must provide reasonable
substantiation of all expenses claimed that exceed
the standard amount. Document the case file
accordingly. For example:
·
bank
statements or canceled checks
·
credit card
vouchers
·
rent/lease
receipts and lease agreements
·
payment
coupons
·
court
orders
·
contracts
·
future
expenses, e.g. the birth of a child or the necessary
replacement of a car that will increase expenses.
Example: A taxpayer with physical disabilities or an
unusually large family requires a housing cost that
is not anticipated by the local standard. The
taxpayer is required to provide copies of mortgage
or rent payments, utility bills and maintenance
costs to verify the necessary amount.
7.
Analysis
and verification of a Collection Information
Statement (CIS) should take place shortly after
receipt of the CIS. The ability to pay determination
based on this analysis will be communicated to the
taxpayer within a reasonable amount of time after
receipt of the CIS.
8.
Collection
Information Statements submitted by taxpayers should
reflect information no older than the prior six
months. If during the investigation of the case, the
information becomes older than 12 months, update the
information. If there is reason to believe that the
taxpayer's situation may have significantly changed,
secure a new Collection Information Statement.
9.
Secure,
review and discuss the financial statements in
person whenever possible. While some aspects of the
financial statement review process, such as securing
financial information, can occur by phone or
correspondence, a face to face meeting with the
taxpayer and/or his/her representative is preferred
to effectively facilitate the
verification/validation of the financial statements
provided. This face to face interview should be
conducted at the taxpayer’s business, residence or
in the office unless the taxpayer is physically
unable to meet with the revenue officer. The
physical verification of the business assets is
required at some point early in the financial
statement review process and should be conducted in
the presence of the taxpayer and/or representative.
10.
Emphasize
to the taxpayer how much we expect from them rather
than how we expect them to spend their money.
.
Advise the
taxpayer that we expect an amount equal to that
amount in excess of necessary or not allowable
conditional expenses.
A.
Advise the
taxpayer that he or she is responsible for
determining what modifications are needed in order
to pay their liabilities. Do not tell the taxpayer
what he or she can or cannot own.
5.15.1.2 (05-01-2004)
Analyzing Financial Information
1.
Analyze the
income and expenses to determine the amount of
disposable income (gross income less all allowable
expenses) available to apply to the tax liability.
2.
Analyze
assets to resolve the balance due accounts.
A.
Request
immediate payment if the taxpayer has cash equal to
the total liability.
B.
Identify
key source of funds.
C.
Identify
liquid assets which can be pledged as security or
readily converted to cash. (For example, equipment
or factoring accounts receivable.)
D.
Consider
unencumbered assets, equity in encumbered assets,
interests in estates and trusts, and lines of
credits from which money may be borrowed to make
payment. (For example, credit card advances or
loans.)
E.
Consider
taxpayer's ability to get an unsecured loan.
F.
Consider
deferring payment of certain other debts in order to
pay the tax liability.
3.
In some
cases, payments on expense items are not due in
regular monthly increments. Average expense items
with varying monthly payments over 12 months unless
the variation is excessive.
Example: Car insurance may be paid quarterly or twice a
year.
4.
One Year
Rule: Taxpayers who cannot full pay their accounts
within five years may be given up to one year to
modify or eliminate excessive necessary expenses. By
modifying or eliminating some conditional expenses,
a taxpayer may be able to full pay the liability
within the five-year limit. This would enable a
taxpayer to retain some conditional expenses.
5.
Five Year
Rule: All expenses may be allowed if:
A.
Taxpayer
establishes that he or she can stay current in all
paying and filing requirements.
B.
Tax
liability, including projected accruals, can be paid
within five years.
C.
Expense
amounts are reasonable.
6.
Agreements
will be based on a taxpayer's maximum ability to
pay; i.e., how quickly a taxpayer can fully pay the
tax liability. Do not automatically allow agreements
based on the five-year maximum.
5.15.1.3 (05-01-2004)
Verifying Financial Information
1.
When
conducting interviews to secure and/or review
financial statements ask pertinent questions to
determine as much as possible about the taxpayer's
financial condition and document the results. For
example:
A.
How the
taxpayer generates income, both foreign and
domestic.
B.
The nature
of their business process.
C.
The main
products/services, type of customers, wholesale vs.
retail, etc.
D.
Major
suppliers and competitors.
E.
Assets held
in the name of the taxpayer or on their behalf, both
foreign and domestic.
2.
Observe and
document the physical layout of the business, the
number of employees, the type and location of
equipment, machinery, vehicles and inventory. A
brief tour of the business premises may help to
gauge the business operation and the condition of
assets.
3.
A thorough
verification of the Collection Information Statement
(CIS) involves reviewing information available from
internal sources and requesting that the taxpayer
provide additional information or documents that are
necessary to determine reasonable collection
potential. Consider contacting third parties to
verify or obtain information (see
IRM
5.1.17).
4.
Collection
issues that have been previously addressed during a
balance due investigation by field personnel in the
preceding 12 months will not be re-examined unless
there is convincing evidence that such
reinvestigation is absolutely necessary.
Example: If the previous revenue officer has completed a
full CIS analysis within the last 12 months
including verification of assets, income, and
expenses and has made a determination of Fair Market
Value of assets, equity in assets and monthly
ability to pay, the information should not be
reinvestigated unless there is reason to believe the
taxpayer's situation has significantly changed.
5.
A taxpayer
is not required to substantiate expenses that are
categorized as National Standards unless they exceed
the Standard.
6.
A taxpayer
may be required to substantiate expenses that are
categorized as Local Standards or Other Necessary
Expenses (LEM 5.3.1).
7.
Substantiation
of expense amounts could include items like bank
statements, credit cards vouchers, rent/lease
receipts and leases, payment coupons, court orders,
contracts, and canceled checks. Document how
obligations are being met and the source of funds.
Taxpayers who own realty should provide documents
showing the monthly payment, the purchase price,
date of purchase, and the principal amount due. When
obtaining documents for substantiation, ask the
taxpayer for copies, not original documents. If
necessary, secure telephone numbers and contact
names of creditors. These can be used if
verification is necessary.
8.
When
analyzing expenses for a business taxpayer, ensure
that business expenses are not included under
personal expenses. Compare the 433-A and 433-B to
income tax returns to verify assets and income or
analyze bank deposits.
Example: Taxpayer claims the lease payment of an automobile
for business and personal use. The expense will not
be allowed as part of the transportation expense on
the 433-A.
9.
Secure
third party information such as bank deposit
records, government agency records, competitors or
suppliers to determine the source of funds of the
taxpayer. Ensure that third party notice
requirements are met (refer to
IRM
5.1.17, Third Party Contacts). Use summons authority
to secure leads to assets and income (refer to
IRM
25.5, Summons).
10.
Compare
income to expenses. If expenses exceed income, ask
the taxpayer probing questions to determine
alternate sources of income that may be
supplementing his/her income. Look for and consider:
·
"non-cash
expenses" such as depreciation or amortization
of assets
·
"book
value" vs. Fair Market Value (FMV)
·
non-payment
of accounts receivables (in dispute)
·
down-sizing/insolvent
(a viable business)
·
roommate(s)
or rental income
·
commingling
of funds between unrelated entities
On business accounts, determine if there
are "non-cash " expenses such as
depreciation or amortization. Also consider a
commingling of funds between related entities.
Examine prior year returns to detect sporadic
income. Review bank deposits for the past 3-6 months
to determine the taxpayer's stated income.
5.15.1.4 (05-01-2004)
Shared Expenses
1.
Generally,
a taxpayer will be allowed only the expenses they
are required to pay. Consideration must be given to
any other income into the household and any expenses
shared with a not liable person(s).
2.
Generally,
the assets and income of a not liable person are
considered in the computation of the taxpayer's
ability to pay. Their income is considered in the
computation of the taxpayer’s ability to pay the
debt from disposable income. One notable exception
is community property states. Follow the community
property laws in these states to determine what
assets and income of the otherwise not liable spouse
are subject to collection of the tax.
Note:
Community Property States: Arizona,
California, Idaho, Louisiana, Nevada, New Mexico,
Texas, Washington, and Wisconsin. (
IRM
5.17.2.4.2.1)
3.
When the
taxpayer indicates income is not commingled and
responsibility for specific expenses is divided
between the cohabitants, allow the expenses assigned
to the taxpayer or apply the taxpayer's percentage
of income to the total expenses, whichever is less.
5.15.1.5 (05-01-2004)
Internal Sources
1.
Verify as
much of the financial statement as possible through
internal sources.
2.
When
internal locator services are not available, or a
discrepancy is indicated, request the taxpayer to
provide reasonable information necessary to support
their financial statement.
3.
For
CNC
hardship or Offer in Compromise cases, a full credit
report is required on all cases with a total
liability (including accrued penalty and interest)
greater than $100,000. Unable to contact or unable
to locate
CNC
cases over $50,000 (including accrued penalty and
interest) require a full credit report. For all
other investigations, consider securing a full
credit report as additional verification of the
taxpayer's financial situation if warranted by the
facts and circumstances.
4.
Regardless
of the amount of the liability consider the
following:
|
Internal Sources
|
Review
|
|
ENMOD and INOLES
|
Identify cross-reference
TIN
's for related business activity not declared
on the CIS.
|
|
SUMRY, IMFOL and BMFOL
|
Verify full compliance.
|
|
RTVUE (IMF) or copy of the last filed return (1040)
|
• Compare the amount of reported income to that declared on the
CIS.
•Identify past sources of income:
A.
Schedule A: itemized
deductions, such as mortgage
interest
B.
Sch | | 
