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Financial Analysis |
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| Internal Sources | Review |
|---|---|
| ENMOD and INOLES | Identify cross reference TINs for related business activity not declared on the CIS. |
| SUMRY, IMFOL and BMFOL | Verify full compliance. |
| RTVUE (IMF) or copy of the last filed income tax return |
• Compare the amount
of reported income
to that declared on
the CIS. • Identify past sources of income: Schedule B — interest and dividends Schedule C — self-employment income Schedule D — capital gains or losses Schedule E — rental or other investment income, net operating loss deduction Schedule F — farm income |
| IRPTRO and/or copy of older year income tax returns |
•Compare real estate tax and mortgage interest deductions to the amounts declared on the CIS. Higher amounts may indicate present or past real property ownership not declared on the CIS. Lower amounts may indicate property has been recently sold or transferred. •Identify accounts not reported on the CIS, such as certificates of deposit or investment accounts. •Verify sources of income, such as employers, bank accounts, and retirement accounts. •Identify recently dissipated assets. |
| BRTVUE (BMF) or copy of last filed income tax return |
• Compare the amount
of reported income
to that declared on
the CIS. • Compare the value of assets and the amount of reported depreciation to the asset values declared on the CIS. |
| State Motor Vehicle Records | Identify motor vehicles registered to the taxpayer but not declared on the CIS. Also check for ownership in business names. |
| Real Estate Records |
• Identify real
property titled to
the taxpayer but not
declared on the CIS. • Identify property held by transferee, nominee or alter ego. Also check for ownership in business names. |
| Credit Bureau Report |
• Identify past
residences and
employers. • Verify competing lien holders, balances due and payment history. •Identify property not listed on CIS. |
5.8.5.2.2
(11-15-2004)
Taxpayer Submitted Documents
- Collection Information Statements (CIS) submitted with an offer in compromise should reflect information no older than the prior six months. If during the processing of the offer, the financial information becomes older than 12 months, contact should be made with the taxpayer to update the information. However, in certain situations information may become outdated due to significant processing delays caused by the Service, through no fault of the taxpayer. In those cases, it may be appropriate to rely on the outdated information if there is no indication the taxpayer's overall situation has significantly changed. Judgment should be exercised to determine whether, and to what extent, updated information is necessary. If there is any reason to believe the taxpayer's situation may have significantly changed, secure a new CIS.
- Do not make a blanket request for information. Tailor your request to each taxpayer’s specific situation. Do not require the taxpayer to provide information that is available from internal sources.
- Offer Investigators may receive offers (other than those identified by the "Screen for Obvious Full Pay" process) where the taxpayers have not provided, either proof of payment for certain monthly expenses claimed in Section 9 of Form 433-A, or statements showing current real estate mortgage or motor vehicle loan balance. Often the taxpayers are not actually paying claimed expenses, or they are not allowable under offer program guidelines. For example, taxpayers frequently list their unallowable credit card bills under secured debt or other expenses. While a taxpayer may have a liability for a court ordered judgment that is senior to the Notice of Federal Tax Lien (NFTL), unless they are actually making payments on that liability it is not considered as an allowable monthly expense.
- If taxpayers do not substantiate claimed expenses for Form 433-A categories of health care expenses, court ordered payments, child/dependent care, life insurance, other secured debt or other expenses, Offers Investigators will complete the IET assuming that the taxpayer is not making any payments for the particular unsubstantiated expense, except for health care. In those cases, refer to LEM 5.3.1.
- When computing equity in real estate or allowable motor vehicles, and the taxpayer has not submitted substantiation of loan balances claimed on the Form 433-A, Offers Investigators should rely on credit report loan balance information to determine the current balances of any relevant loans from commercial lenders. If the loan is from a private source, it may be necessary to contact the taxpayer/representative for the information.
-
If not
present in the file when assigned
for investigation, appropriate
documentation from the chart below
should be requested to verify the
information on the Collection
Information Statement (CIS).
Taxpayer Documentation Review Wage Earner — wage statements for the prior three months A statement with current year–to–date figures is also acceptable. • Compare average earnings to the income declared on the CIS.
• Verify adequate tax withholding.
• Identify payroll deductions to ensure the expense is necessary and not claimed again on the CIS.
•Identify deductions to savings accounts, credit union accounts or retirement accounts.Self-employed — proof of gross income (invoices, accounts receivable, commission statements, etc.) for the prior three months. • Compare average earnings to the income declared on the CIS.
• Identify deductions to ensure the expense is necessary and not claimed again on the CIS.Three (3) current months of bank statements that show the monthly transactions, withdrawals and deposits. Compare deposit amounts to income reported on the tax return and CIS. Question deposits that exceed reported income and unusual expenses paid. Consider asking for the cancelled checks and deposit items for a specified time frame if questionable items cannot be adequately explained. Retirement account statements and brochures, brokerage account statements, securities or other investments Identify the type, conditions for withdrawal and current market value. Life insurance policies •Identify the type, conditions for borrowing or cancellation and the current loan and cash values.
• Verify the amount of the required premiums and ensure payments are being made.Motor vehicle purchase or lease contracts, statements from the lender indicating the payoff amount Verify equity and monthly payment expense. Real estate warranty deeds, mortgage deeds, HUD closing statements, statements from the lender indicating the pay off amount Identify the type of ownership, amount of equity and monthly payment expense. Homeowners or renters insurance policies and riders. • Compare the insured value to the value declared on the CIS.
• Identify high value personal items such as jewelry, antiques or artwork.Financial statements recently provided to lending institutions or others. Compare the financial information on the CIS to those submitted to other lending institutions. Divorce court orders. Verify disposition of assets in the property settlement. Court orders for child support and proof of payment. Verify responsibility for child support, that the payments are actually being made, and the length of time payments are required to be made.
5.8.5.3
(11-15-2004)
Equity in Assets
- Proper asset valuation is essential to determine reasonable collection potential (RCP).
- Field calls may be made to locate or personally ascertain the condition of assets.
- Assets will not be eliminated or valued at zero dollars simply because the Service may choose not to take enforcement action against the asset, even though the net result is rejection of the offer and reporting the case currently not collectible.
5.8.5.3.1
(11-15-2004)
Net Realizable Equity
- For offer purposes, assets are valued at Net realizable equity (NRE). Net realizable equity is defined as Quick Sale Value (QSV) less amounts owed to secured lien holders with priority over the federal tax lien.
- Quick sale value (QSV) is defined as an estimate of the price a seller could get for the asset in a situation where financial pressures motivate the owner to sell in a short period of time, usually 90 calendar days or less. Generally, QSV is an amount less than fair market value (FMV) but greater than forced sale value (FSV). FSV is defined as no less than 75% of FMV.
- Normally, Quick Sale Value (QSV) is calculated at 80% of Fair Market Value (FMV). A higher or lower percentage may be applied in determining QSV when appropriate, depending on the type of asset and/or current market conditions. If, based on the current market and area economic conditions it is believed that the property would quickly sell at full FMV, then it may be appropriate to consider QSV to be the same as FMV. This is occasionally found to be true in real estate markets where real estate is selling quickly at or above the listing price. As long as the value chosen represents a fair estimate of the price a seller could get for the asset in a situation where the asset must be sold quickly (usually 90 calendar days or less) then it would be appropriate to use of a percentage other than 80%. Generally, it is the policy of the Service to apply QSV in valuing property for offer purposes.
- When a particular asset has been sold (or a sale is pending) in order to fund the offer, no reduction for quick sale value (QSV) should be made. Instead, verify the actual sale price, ensuring that the sale is an arms length transaction, and use that amount as the QSV. A reduction may be made for the costs of the sale and the expected current year tax consequence to arrive at the net realizable equity (NRE) of the asset.
5.8.5.3.2
(11-15-2004)
Jointly Held Assets
-
When
taxpayers submit separate offers but
have jointly owned assets, allocate
equity in the assets equally between
the owners. However:
If… Then… The joint owners demonstrate their interest in the property is not equally divided Allocate the equity based on each owner's contribution to the value of 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. - See IRM 5.8.5.3.11(4) for a discussion of assets held as tenancies by the entirety.
5.8.5.3.3
(11-15-2004)
Income-Producing Assets
- When determining the reasonable collection potential (RCP) for an offer that includes business assets, an analysis is necessary to determine if certain assets are essential for the production of income. When it is determined that an asset or a portion of an asset is necessary for the production of income, it may be appropriate to adjust the income or expense calculation for that taxpayer to account for the loss of income stream if the asset was either liquidated or used as collateral to secure a loan to fund the offer .
-
When
valuing income-producing assets:
If… Then… There is no equity in the assets There is no adjustment necessary to the income stream. There is equity and no available income stream (i.e. profit) produced by those assets There is no adjustment necessary to the income stream. Consider including the equity in the asset in the RCP. There are both equity in assets that are determined to be necessary for the production of income and an available income stream produced by those assets Compare the value of the income stream produced by the income producing asset(s) to the equity that is available.
Determine if an adjustment to income or expenses is appropriate.An asset used in the production of income will be liquidated to help fund an offer Adjusting the income to account for the loss of the asset. A taxpayer borrows against an asset that is necessary for the production of income, and devotes the proceeds to the payment of the offer Consider the effect that loan will have on future expenses and the future income stream. The taxpayer is either unable or unwilling to secure a loan on the equity in income producing assets Compare the equity in the assets with the income produced by those assets. Determine if an adjustment to income stream is appropriate to account for the potential loss of the assets. -
These
considerations should be fully
documented in the case history. For
example:
If… Then… A self-employed construction tradesman sells a truck, which he used to haul materials, and devotes the proceeds to the offer Consider allowing the expected cost of delivery services as a business expense. A tradesman borrows against the truck instead of selling it and devotes the proceeds to the offer Consider allowing the loan repayment as a business expense. A loan cannot be secured and loss of the truck would create an economic hardship When special circumstances warrant acceptance of less than RCP, document the circumstances and recommend acceptance to the authorized official in Delegation Order 11. An outside salesman has a luxury car when all that is necessary is a moderate value sedan The equity should be included in the offer. Consider allowing only a portion of the loan repayment that would be required to purchase a moderate value replacement vehicle. An outside salesman has a luxury car but no ability to make installment payments for purchase of a moderate value replacement vehicle The equity should be included in the offer. When special circumstances warrant acceptance of less than the RCP, document the circumstances and recommend acceptance to the authorized official in Delegation Order 11. Determine the acceptable amount of a special circumstances offer by allowing the taxpayer to retain only enough equity to purchase a moderate value replacement vehicle. A business owns a vacation property, which is used for annual board meetings. The equity should be included in the offer. Do not allow any loan repayment.
5.8.5.3.4
(11-15-2004)
Assets Held By Others as
Transferees, Nominees or Alter
Egos
- A critical part of the financial analysis is to determine what degree of control the taxpayer has over assets and income in the possession of others. This is especially true when the offer will be funded by a third party.
- When these issues arise, apply the principles in IRM 5.17.1, Legal Reference Guide for Revenue Officers or request a counsel opinion.
- It is not necessary to actually seek or obtain any specific legal remedy in order to address these issues in an offer.
- If the taxpayer has a beneficial interest in the asset or income stream then the value should be reflected in the reasonable collection potential (RCP).
5.8.5.3.5
(11-15-2004)
Cash
-
Review
checking account statements over a
reasonable period of time, normally
three months.
Note:
Determine if there are funds in the account that are not spent on a monthly basis. Generally this would be the amount reflected on each month's statement when the account is at its lowest point. Treat overdrafts as a zero balance. This should represent the amount available in the account each month after all deposits and withdrawals. Average the lowest daily ending balance on each of the three statements and use this amount as the value of the account. This amount will be added to the AET as an asset, however, it cannot be valued for less than zero.
- Determine the taxpayer’s interest in bank accounts by ascertaining the manner in which they are held and applying the principles described in IRM 5.17.1, Legal Reference Guide for Revenue Officers.
- If analysis of the bank statements and/or discussions with the taxpayer reveal that an adjustment to the balance is appropriate based on unusual expenses that are necessary for the production of income or the health and welfare of the taxpayer, consider adjusting the balance. The case file should clearly document these determinations.
- Analyze the statement for any unusual activity, i.e. deposit in excess of reported income, withdrawals, transfers, or checks for expenses not reflected on the Collection Information Statement (CIS). The Offer Investigator should question these inconsistencies, as appropriate.
-
Review
savings accounts statements over a
reasonable period of time, normally
three months.
- If the account has little withdrawal activity use the ending balance on the latest statement as the asset value for the AET.
- If it is apparent that the account is used for paying monthly living expenses, treat it as a checking account and follow the instructions in paragraphs (1) through (4) above to determine its value.
- If analysis of the bank statement reveals recently dissipated funds, see 5.8.5.4 for a full discussion of the treatment of dissipated assets.
- If the taxpayer offers the balances of accounts to fund the offer, allow for any penalty for early withdrawal and the expected current year tax consequence.
- Verify whether deposits in escrow or trust accounts are actually held for the benefit of others.
- For funds on deposit with the offer in compromise, allow as an encumbrance any amount borrowed under the provision that, if the offer is not accepted, it must be repaid.
5.8.5.3.6
(11-15-2004)
Securities
- Financial securities are considered an asset and their value should be determined and included in the reasonable collection potential (RCP) when investigating an offer.
- When the taxpayer will liquidate the investment to fund the offer, allow any penalty for early withdrawal and the current year tax consequence.
- To determine the value of publicly traded stock, research a daily paper or inquire with a broker for the current market price. Then, allow for the estimated costs of the sale to arrive at the Quick Sale Value (QSV).
-
To
determine the value of closely held
stock that is either not traded
publicly or for which there is no
established market, consider the
following methods of valuing the
company and assign a proportion of
the company's value to the
taxpayer's stock:
- Secure and verify a Collection Information Statement.
- Review recent year's annual report to stockholders.
- Review recent year's corporate income tax returns.
- Request an appraisal of the business as a going concern by a qualified and impartial appraiser.
- When a taxpayer holds only a negligible or token interest, has made no investment and exercises no control over the corporate affairs, it is permissible to assign no value to the stock.
5.8.5.3.7
(11-15-2004)
Life Insurance
- Life insurance as an investment is not considered necessary. However, reasonable premiums for term life policies may be allowed as a necessary expense.
-
When
determining the value in a
taxpayer’s insurance policy,
consider:
If… Then… The taxpayer will retain or sell the policy to help fund the offer Equity is the cash surrender value. 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.
5.8.5.3.8
(11-15-2004)
Retirement or Profit Sharing
Plans
- Funds held in a retirement or profit sharing plan are considered an asset and must be valued for offer purposes.
- Contributions to voluntary retirement plans are not a necessary expense. Review of the retirement plan document is generally necessary to determine the taxpayer's benefits and options under the plan.
-
When
determining the value of a
taxpayer's pension and profit
sharing plans consider:
If… And… Then… The account is an Individual Retirement Account (IRA), 401(k) or Keogh Account The taxpayer is not retired or close to retirement Equity is the cash value less any expense for liquidating the account and early withdrawal penalty. The account is an Individual Retirement Account (IRA), 401(k) or Keogh Account The taxpayer is retired or close to retirement Equity is the cash value less any expense for liquidating the account and early withdrawal penalty. The plan may be considered as income, if the income from the plan is necessary to provide for necessary living expenses. The contribution to a retirement plan is required as a condition of employment The taxpayer is able to withdraw funds from the account Equity is the amount the taxpayer can withdraw less any expense associated with the withdrawal The contribution to an employer's plan is required as a condition of employment The taxpayer is unable to withdraw funds from the account but is permitted to borrow on the plan Equity is the available loan value. The plan may not be borrowed on or liquidated until separation from employment The taxpayer is retired, eligible to retire or close to retirement Equity is the cash value less any expense for liquidating the account and early withdrawal penalty, or consider the plan as income, if the income from the plan is necessary to provide for necessary living expenses. The plan may not be borrowed on or liquidated until separation from employment The taxpayer is not eligible to retire until after the period for which we are calculating future income The plan has no equity. The plan includes a stock option The taxpayer is eligible to take the option Equity is the value of the stock at current market price less any expense to exercise the option. - When the taxpayer will liquidate the retirement plan to fund the offer, allow any penalty for early withdrawal and the current year tax consequence.
5.8.5.3.9
(11-15-2004)
Furniture, Fixtures, and
Personal Effects
- The taxpayer's declared value of household goods is usually acceptable unless there are articles of extraordinary value such as; antiques, artwork, jewelry, or collector's items. Exercise discretion in determining whether the assets warrant personal inspection.
- There is a statutory exemption from levy that applies to the taxpayer's furniture and personal effects. This exemption applies only to individual taxpayers. This exemption amount is updated on an annual basis.
-
When
determining the value consider the
following:
If… Then… 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.
5.8.5.3.10 (11-15-2004)
Motor Vehicles, Airplanes and
Boats
- Equity in motor vehicles, airplanes, and boats must be determined and included in the reasonable collection potential (RCP). The general rule for determining net realizable equity (NRE), as discussed in IRM 5.8.5.3.1, applies when determining equity in these assets. Unusual assets such as airplanes and boats may require an appraisal to determine Fair Market Value (FMV), unless the items can be located in a trade association guide. The case file should document how the values were determined.
-
Generally,
it is not necessary to personally
inspect automobiles used for
personal transportation. When it
appears reasonable, accept the
taxpayers stated value. No further
investigation is required except for
vehicles that are three years old or
newer with no lien. For these
vehicles, consult a trade
association guide and discount the
Fair Market Value (FMV) to 80% to
arrive at the Quick Sale Value
(QSV).
Example:
When investigating an offer in the year 2003, a 2001 model year is 3 years old or newer.
- When these assets are used for business purposes they may be considered income producing assets. See IRM 5.8.5.3.3 for a full discussion on the treatment of income producing assets.
5.8.5.3.11 (11-15-2004)
Real Estate
- Equity in real estate is included when calculating the taxpayer's reasonable collection potential (RCP) and in an acceptable offer amount.
-
When
determining equity in real estate,
the fair market value (FMV) of the
property must be established. FMV is
defined as the price a willing buyer
will pay for the property, given
time to obtain the best and highest
possible price. The following
methods may be used to establish
FMV:
- Recent purchase price or an existing contract to sell
- Recent appraisals
- Real estate tax assessment