Section 5. Financial Analysis

(1) This transmits a revision for IRM 5.8.5, Offer in Compromise, Financial Analysis.

Material Changes

(1) The following subsections were revised:

(2) Reviewed and updated website addresses, legal references and IRM references, as necessary.

Effect on Other Documents

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.

Audience

SBSE Collection Offer Examiners, Offer Specialists, and other IRS employees who conduct investigations of a taxpayer’s offer in compromise.

Effective Date

Rocco A. Steco
Director, Collection Policy

Program Scope and Objectives

1. Purpose : This section provides:

• Instructions for financial analysis while conducting offer investigations.
• Guidance on the valuation of assets in determining reasonable collection potential (RCP).
• Information on research tools available to locate and value taxpayer’s income and assets.

• Offer examiners (OE) in Centralized Offer in Compromise (COIC).
• Offer specialists (OS) in the Field Offer Territories (FOIC).
• Employees assigned to the offer program and any others who conduct offer in compromise investigations and consider offer in compromise appeals.

Background

1. An offer in compromise (referred to as an offer or OIC) is a taxpayer’s written proposal to the Government to settle a tax liability for an amount less than previously determined and assessed. Revenue Procedure 2003-71 explains the procedures applicable to the submission and processing of offers to compromise a tax liability under Section 7122 of the Internal Revenue Code. The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) also provided additional requirements for submission of an offer.
2. Doubt as to Collectability offers are submitted to one of the IRS locations for consideration and evaluated on the basis of its processability, the taxpayer’s ability to pay, and the taxpayer’s foreseeable future earnings. 26 CFR 300.3, Offer to compromise fee, and Notice 2006-68 also provide information on the submission of payments and fees associated with an offer submission. During the offer investigation, the taxpayer’s individual circumstances are evaluated and the IRS will make a determination for disposition to either return, reject, terminate, or accept the offer, or the offer may be withdrawn. This section provides direction to offer examiners, offer specialists, and IRS employees in the Independent Office of Appeals who conduct financial analysis of a taxpayer’s offer in compromise.

Authority

1. Authorities relating to this section include:

• Internal Revenue Code (IRC) 7122 - Compromises
• Treasury Regulations 301.7122-1 - Compromises
• IRC 6702(b) - Civil penalty for specified frivolous submissions
• Policy Statement 5-100, Offers will be accepted, located in IRM 1.2.1.6.17
• Policy Statement 5-89, Offer may be rejected for public policy reasons, located in IRM 1.2.1.6.15
• 26 CFR 300.3, Offer to compromise fee
• Revenue Procedure 2003-71
• Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA)
• Notice 2006-68
• IRM 1.2.1, Servicewide Policy Statements
• IRM 1.2.2, Servicewide Delegations of Authority

Responsibilities

1. The director, Collection Policy is responsible for all policies and procedures within the Offer in Compromise program.
2. The national program manager, Offer in Compromise is responsible for development and delivery of policies and procedures within the program.
3. Managers of employees investigating offers are responsible for ensuring these procedures are followed and employee actions are timely and accurate.
4. Offer examiners, offer specialists, and other employees investigating offers are responsible for following the procedures in this IRM.

Program Management and Review

1. Operational and program reviews are conducted on a yearly basis by the director Specialty Collection Offers in Compromise, (SCOIC) and Collection Policy, respectively, with the use of data and reports from the Automated Offer In Compromise (AOIC) system and ENTITY case management system. Additional ad hoc reports which provide information on the inventory levels, hours per case, and age of offers in inventory or at time of closure are also provided. See IRM 1.4.52, Resource Guide for Managers, Offer in Compromise Manager’s Resource Guide.
2. Managerial case reviews are also completed as defined in IRM 1.4.52 Offer in Compromise Manager’s Resource Guide. These reviews are a method to determine if the offer amount accurately reflects the reasonable collection potential (RCP) as defined in Policy Statement 5-100.
3. National quality reviews and consistency reviews are routinely conducted to ensure program consistency and effectiveness in case processing. As a result of these reviews, procedural changes may be required to improve the quality and effectiveness of the program.

Program Controls

1. AOIC is used to track offers submitted by taxpayers and record case actions and history. Ability to take action on AOIC is limited to specific offer employees. Additional permissions are provided based on an employee’s duties and responsibilities.
2. ICS is used by FOIC as a method for inventory control and history documentation.
3. Managers are required to follow program management procedures and controls addressed in IRM 1.4.52, Resource Guide for Managers.
4. Managerial Requirements for case approval are defined in Del. Order 5-1.
5. The review conducted by the Office of Chief Counsel on certain offers is in accordance with Treasury Regulations 301.7122-1 - Compromises.

Terms/Definitions/Acronyms

1. The following table is a list of common abbreviations, definitions and acronyms used throughout this IRM.

Related Resources

1. Additional resources can be found in IRM 5.8, Offer in Compromise, and IRM 5.15.1, Financial Analysis Handbook.
2. Employees can find helpful information on these websites:

• SERP
• Internal Management Document site

Ability to Pay

1. The ability to pay determination will be made on the liability(s) (assessed and unassessed) due at the time the taxpayer submitted the offer .
2. Complete a calculation based on the Collection Information Statement submitted with the offer to determine if the taxpayer can full pay through installment agreement guidelines, liquidating or borrowing from equity in assets, or a combination of both. Compute the taxpayer’s ability to make payments over the remaining Collection Statute Expiration Date (CSED), based on submitted substantiation and applying installment agreement standards and allowances. Do not include the additional allowances provided in IRM 5.8.5.7 , Cash, and IRM 5.8.5.12 , Motor Vehicles, Airplanes, and Boats when completing the initial full pay determination. It is appropriate to use Decision Point (AOIC) or Integrated Automation Technologies (IAT) Compliance Suite Payment Calculator (IAT Tools) to ensure accruals are taken into consideration. Complete this computation after the taxpayer’s compliance has been verified and prior to initial financial analysis.

Note:

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.

Exception:

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.

Taxpayer Submitted Documents

1. Collection Information Statements (CIS) and related documentation submitted with an OIC should reflect current information as of the date of the OIC submission.
2. If during the investigation, the financial information becomes older than 12 months and it appears significant changes have occurred, a request for updated information may be appropriate. Prior to contacting the taxpayer, attempt to secure the necessary verification through internal sources. If taxpayer contact is required, it is preferable to initiate contact via telephone or IRS approved electronic means, such as Secure Messaging, to expedite case processing.
3. In certain situations, information may become outdated due to significant processing delays caused by the IRS and 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 (i.e. change of employment, loss of job, etc.), and substantiation cannot be secured via internal research, secure a new CIS or update the CIS information through taxpayer contact.
4. The offer specialist/offer examiner (OE/OS) must use caution when taxpayers submit a joint offer in which the taxpayers do not reside together, the IRS must not disclose financial information provided by one spouse to the other spouse who does not live in the same household. In these instances, it may be appropriate to ask the taxpayers to submit two offers since the financial information must be evaluated separately. If the taxpayers are unwilling to submit two offers, securing a Form 8821, Tax Information Authorization, will allow for the ability to share information with the other spouse, if necessary. If the taxpayers refuse to submit two offers or a Form 8821, the offer investigation may proceed if all information is available to make a decision on the taxpayer’s offer. If either taxpayer is unable or unwilling to provide requested financial information the joint offer may be returned under the provisions that requested financial information was not provided.

Note:

If taxpayers are submitting a joint offer and do not reside in the same household, separate Forms 433-A/B(OIC) are required.

Verification

1. A thorough verification of the taxpayer's CIS, Form 433-A(OIC) and/or Form 433-B(OIC), involves reviewing taxpayer submitted documentation and information available from internal sources. As a general rule, additional documentation will not be requested when the information is readily available from internal sources or it would not change the recommendation.

Note:

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

Example:

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.

Verification through Internal & External Research

1. Verify as much of the CIS as possible through internal and external research sources.
2. Research OIC-IAT to screen for account conditions that may:

• Preclude consideration of an offer
• Warrant a “not in the best interest of the government” rejection (see IRM 5.8.7.7.1)
• Require additional investigation

• Compare the amount of reported income and expenses declared on the CIS to verify the amounts are within reason.
• Review income sources such as dividends or capital gains for potential assets.
• Compare real estate and mortgage interest deductions to the CIS to identify property ownership and expenses.
• Review deductions or expenses on Schedules A, C, or E for potential assets.

Note:

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.

• Compare real estate tax and mortgage interest deductions to the amounts declared on the CIS. Discuss any difference with the taxpayer to determine the reason for the increase or decrease.
• 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 recent transferred or disposed of assets, such as stocks and bonds.
• Review W-2 information to determine if taxable wages are less than FICA wages, which may indicate the taxpayer has an employer sponsored retirement account (401k or 403b) or other non-taxable income.
• Identify foreign bank and Financial Account Report (FBAR) transactions.
• Review Forms 1099 for income sources or potential assets such as:

• F1099-MISC/NEC: Income sources
• F1099-INT: Cash in interest bearing account
• F1099-B or DIV: Stocks or brokerage account
• F1099-R: Retirement account
• F1099-S: Sale of real estate

Note:

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.

Note:

• 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.

Note:

The date the image was added to Google Maps should be noted to determine if is still an accurate picture.

• Identify potential FMV of property.
• Identify sale and tax assessment history.
• Research comparable sales to determine FMV.
• Identify property and neighborhood condition.

• Identify related entities, including shareholders and partners.
• Look for an analysis of the relationships between the associated entities. Identify footprints which may indicate shelter activity.
• Look for a visual representation of structure and linkages between the taxpayer and related entities.

Note:

• Identify past residences and employers.
• Verify competing lien holders, balances due and payment history.
• Identify property not listed on CIS.

• Identify potential income sources and assets on a taxpayer’s website.
• Determine the value of assets.
• Research property ownership and values.
• Identify possible business interests.
• Research business industry trends.

Note:

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.

Securing Credit Reports to Verify Taxpayer Information

1. Based on your discretion and judgment, consider securing a full credit report to assist in locating taxpayer assets, verifying financial information, and/or determining an alternative resolution to an OIC. The case history must be documented with the reason(s) for the request.

Note:

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.

Note:

1. For rejected cases, refer to IRM 5.8.7.11, Destruction of Credit Reports.
2. For accepted cases, refer to IRM 5.8.8.15, Destruction of Credit Reports.
3. For all other closures (returned, withdrawn, terminated), refer to IRM 5.8.7.11, Destruction of Credit Reports.

Researching Foreign Assets

1. When a taxpayer owns or indications are they may own assets outside the country the OE/OS must include those assets in the calculation of RCP. Assets may include, real property, bank accounts, other personal property, or income sources. Information is available in IRM 5.21.3, Collection Tools for International Cases to assist in locating and valuing assets outside the country. In some instances, it may be appropriate to contact an International or Abusive Tax Avoidance Transaction group for assistance in valuing or locating these assets.

Securing Foreign Account Tax Compliance Act (FATCA) Data

1. FATCA requires foreign financial institutions (FFIs) and certain non-financial foreign entities to report annually on non-U.S. accounts held by their U.S. account holders. FFIs report FATCA data on Form 8966 , FATCA Report. Even though the IRS possesses the Form 8966 reports, treaty restrictions may limit or prohibit the IRS from using this information. For additional information relating to disclosures under IRC 6103 see IRM 5.1.22, Field Collecting Procedures, Disclosure, and IRM 11.3.2, Disclosure of Official Information, Disclosure to Persons with a Material Interest.
2. An OE/OS should conduct a review of FATCA information on any case in which the taxpayer appears to have an interest in foreign assets or accounts. A FATCA request will also be made if the Form 433-A(OIC) lists foreign income, accounts or other foreign assets. It is also appropriate to request FATCA if the taxpayer has indicated they lived outside the United States or have an interest in a foreign business. FATCA data must be requested from an employee designated as a FATCA Super User. Instructions for submitting a FATCA request form and appropriate use of the information secured is available on the OIC SharePoint site.
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Verification through Taxpayer Contact

1. If not present in the file when assigned for investigation and internal sources are not available or indicate a discrepancy, appropriate documentation will be requested from the taxpayer either verbally, in writing, or through the use of secure messaging, to verify the information on the CIS. A request for additional information and verification should be based on the taxpayer’s circumstances and the information must be necessary to make an informed decision on the acceptability of the taxpayer’s OIC. Do not make a blanket request for information that would have no impact on the case resolution. Do not request any information that is available internally, yet if documents required based on Form 656 instructions were not included, a discussion should be held with the taxpayer/representative about why certain documents were not submitted.

Note:

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.

Note:

• Compare earnings to the income declared on the CIS.
• Verify adequate tax withholding.
• Identify payroll deductions.
• Identify deductions to savings accounts, credit union accounts, or retirement accounts.

Note:

In certain instances, more specific information may be required from the taxpayer including accounts receivable listings, commission statements, etc.

Note:

Only consider requesting specific cancelled checks and deposit items if questionable items cannot be adequately explained. See IRM 5.8.5.7 , Cash.

Note:

If regular deposits are identified from peer to peer payment application sources consider requesting activity statements to verify potential income sources.

Note:

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.

Equity in Assets

1. Proper asset valuation is essential to determine RCP. In some cases, it will be necessary to review the following documents to determine undisclosed assets or income and assist in valuing the property:

1. Divorce decrees or separation agreements to determine the disposition of assets in the property settlements;
2. Homeowners or renters insurance policies and riders to identify high value personal items such as jewelry, antiques, or artwork;
3. Financial statements recently provided to lending institutions or others to identify assets or income that may not have been revealed on the CIS.

Note:

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.

Note:

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.

Net Realizable Equity

1. 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, if applicable, and applicable exemption amounts. See IRM 5.17.2, Federal Tax Liens for more information on lien priorities.
2. 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). For purposes of determining the taxpayer's reasonable collection potential (RCP), information provided by the taxpayer and third party sources available to the OE/OS will be reviewed to arrive at an appropriate FMV of the property.

Note:

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.

Jointly Held Assets

1. Taxpayers who file and owe joint taxes together may be required to submit two Forms 656 if one or both spouses also owe a separate liability. However, one RCP is generally prepared for married taxpayers who live together. The RCP will be allocated between offers when appropriate for each contract, yet there is still one RCP and both offers may be accepted or rejected based on the one RCP.
2. When taxpayers submit separate offers but have jointly owned assets, allocate equity in the assets equally between the owners. However, it may not be equitable to allocate equity equally if one spouse owns a separate asset with substantial value or their interest in the asset is not equal. When allocating equity consider the following:

Example:

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.

Note:

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.

Example:

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.

Example:

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.

Note:

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.

Assets Held By Others as Transferees, Nominees, or Alter Egos

1. 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.
2. When these issues arise, apply the principles in IRM 5.17.14, Fraudulent Transfer and Transferees and Other Third Party Liability, also refer to IRM 5.8.4.21, Responsibility of Offer Examiners, Offers Specialists, and Field Revenue Officers. A request for a Counsel opinion, in accordance with local procedures, prior to the offer recommendation may be necessary to determine an accurate value to include in any acceptable offer amount.

Note:

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.

Cash

1. When determining the taxpayer’s RCP, use the amount listed on the Form 433-A (OIC) for the amount of cash in the taxpayer’s bank accounts, reduced by $1,000.

Note:

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.

Note:

Note:

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.

Example:

(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.

Example:

(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.

Example:

(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.

• If the account has little withdrawal activity, use the ending balance on the latest statement, less $1,000 (IMF taxpayers) if not previously applied to another account, 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), (2), and (3) above to determine its value.

Treatment of Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) Payments on the Asset/Equity Table (AET)

1. Do not include any TIPRA payments (lump sum or periodic) as a separate asset on the AET.
2. Payments in excess of any required TIPRA payment(s) are treated as a tax payment and will not be included on the AET.

Securities, Closely Held Stock, and Business Interests

1. Financial securities are considered an asset and their value must be determined and included in the RCP when investigating an offer.
2. When the taxpayer will liquidate the investment to fund the offer, allow associated fees in addition to any penalty for early withdrawal and the current year tax consequence.
3. To determine the current value of publicly traded stock, verify the current share price of the stock by researching online stock quotes, other internal sources, or request the taxpayer provide a current account statement. Multiply the current share price by the number of shares held to arrive at the value of the stock to be added to the AET.
4. Publicly traded bonds may be bought or sold through an exchange but most are traded over-the-counter (OTC) between bond dealers without the use of a centralized exchange. The value of bonds fluctuate depending on market conditions but they are not as volatile as other investments. To determine the value of bonds use the stated value on the most recent account statement provided by the taxpayer to determine the value to be added to the AET, request an updated statement if the most recent one provided is over one year old.
5. The value of a taxpayer’s holding of closely held stock that is either not traded publicly or for which there is no established market, and the taxpayer’s interest in a Subchapter S Corporation (S Corp.), Partnership, or Limited Liability Corporation (LLC) needs to be determined and added to the AET. To determine the RCP of a taxpayer’s interest in closely held stock or other business entity, consider the following to determine the value of the company’s assets and assign a value to the taxpayer's interest that is equal to their percentage share of the company’s cumulative value of assets:

• Secure and verify a CIS for the S Corp., Partnership, or LLC.
• Review recent year’s annual report to stockholders if available.
• Review recent year’s corporate income tax returns.
• Secure and review statements for bank accounts or other investments, mortgage statements, or other loan documents.
• Research IRPTRO and internet sources, including online real estate valuation resources, to identify or value assets (see IRM 5.8.5.3.1.1 (3)).
• Determine the net realizable equity (NRE) of the corporate assets (see IRM 5.8.5.4.1 ) including cash, property interests, or other holdings.
• Consider requesting an appraisal of the business as a going concern by a qualified and impartial appraiser.

Note:

Use business appraisals only when the cost of the appraisal is justified by the complexity of the business activity.

Example:

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.

Note:

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.

• Compensation to Corporate Officers – Wages and/or other compensation, (i.e., draws) paid to corporate officers must be evaluated to determine if they are reasonable. Compensation that is determined to be excessive may be disallowed and added back into the business income. Use judgment in determining whether the officer compensation is deemed excessive. The Allowable Living Expense (ALE) standards may be used as a guide when considering whether the officer compensation is reasonable. The ALEs should not be the only factor when determining reasonable compensation to the officer. The officer's ownership interest in the business, individual financial condition, local economy, and any control over the compensation received should also be a consideration.
• Stock Holder Distributions – These expenses are discretionary in nature. Evaluate distributions of this nature made after the incurrence of the tax delinquency under the dissipated asset provisions.
• Repayment of Loans to Officers - Loans to officers should be considered an account receivable and valued according to their collectibility. Loans to shareholders may be an indication the taxpayer is paying personal expenses from the corporation’s accounts or receiving payment in the form of loans in lieu of a salary. If the funds are being received on a consistent basis, you may include an amount as income on the IET. Historic activity of the loans to shareholders could provide evidence of consistent payment. Additionally, a determination of an alter ego/nominee situation may also be appropriate based on the amount being received or taken out of the business for personal expenses. Refer to IRM 5.8.4.2(3) table, Responsibility of Offer Examiners, Offer Specialist, and Field Revenue Officers. If you identify a situation in which it appears the taxpayer may be receiving income from loans and their wages are not reasonable, a referral to Examination Division may be appropriate. If the exam referral is accepted, return the offer based on the open examination as other investigations pending as discussed in IRM 5.8.4.17, Pending Assessments.
• Undistributed K-1 Income - Schedule K-1(Form 1065) and Schedule K-1(Form 1120-S) are used to report each individual partner, shareholder, or LLC member’s percentage share of partnership or S-Corp. income. The individual partner, shareholder, or member must report this amount on their individual income tax return even if these funds were never distributed by the business entity, this is sometimes referred to as “phantom income.” The amount reported on the K-1 should be used as a source to verify an individual taxpayer’s income. If the taxpayer indicates they did not receive the amount reported on the K-1, an adjustment may be necessary to remove the undistributed income from the future income value on the IET. The use of any undistributed K-1 income must still be determined. If the partnership, LLC, or S Corp. is still holding undistributed K-1 income in a bank or other account then the amount of cash being held may be added to the AET as an individual asset. If the undistributed funds were used to purchase an asset in the business name then the asset may be considered when determining the value of the taxpayer’s interest in the business, see IRM 5.8.5.8 (5) above.
• Stock Held by Beneficial Owner - The value of stock ownership in a closely held corporation/LLC must be included in the RCP of a taxpayer submitting an offer to compromise their individual liabilities. Do not exclude the value of the stock from RCP solely on the basis that an offer was also submitted by the closely held entity.

Digital Assets

1. A digital asset is defined in IRC 6045(g)(3)(D) as any digital representation of value which is recorded on a cryptographically secured digital ledger or similar technology defined by the Secretary. Digital assets need to be valued and included in the RCP of a taxpayer.
2. Digital assets can take many forms and include the following:

1. Virtual currency is a broad class of digital assets that can function as a medium of exchange, a unit of account, or a store of value other than currency that is legal tender. Virtual currency may or may not be restricted in its use.

Note:

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.

• Request a current account statement from the taxpayer if the asset is held through a brokerage account (cryptocurrency).
• Research the current value of the asset through publicly available blockchain explorers found online.
• Comparison of recent purchase price of a NFT to the taxpayer’s stated value.

Life Insurance

1. Identify the type, conditions for borrowing or cancellation, and the current loan and cash values.
2. Life insurance as an investment (e.g., whole life) is not considered necessary.
3. When determining the value in a taxpayer's insurance policy, consider:

Note:

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."

• A policy may be sold as a life settlement when the taxpayer is not terminally ill and has a life expectancy greater than two years. The age and health of the taxpayer and face value of the policy are factors to consider when determining the value of a policy in a life settlement.
• A policy may be sold as a viatical settlement if the taxpayer has been diagnosed with a terminally ill condition and has a life expectancy of less than two years. Viatical settlements typically have a higher value than life settlements.

• Generally, in a life settlement the policy will be valued between 10% to 20% of the death benefit of the policy.
• In a viatical settlement involving a terminally ill taxpayer with a life expectancy of less than two years, a life insurance policy may be valued at 50% of the policy’s death benefit.

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.

Note:

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Note:

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.

Example:

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.

Example:

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.

Note:

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.

Example:

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.

Retirement or Profit Sharing Plans

1. Funds held in a retirement or profit sharing plan are considered an asset and must be valued for offer purposes.
2. Contributions to voluntary retirement plans are not a necessary expense. Review of the retirement plan document may be necessary to determine the taxpayer's benefits and options under the plan.
3. It may be necessary to secure a copy of the plan to determine the taxpayer’s vested interest and ability to borrow.
4. When determining the value of a taxpayer's pension and profit sharing plans consider:

• Equity is the cash value less any tax consequences for liquidating the account and early withdrawal penalty, if applicable.
• The plan may be considered as income, if the income from the plan is required to provide for necessary living expenses.

Note:

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.

Example:

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.

Furniture, Fixtures, and Personal Effects

1. 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.
2. There is a statutory exemption from levy that applies to a number of items including the taxpayer's furniture and personal effects. This exemption amount is updated on an annual basis.

Note:

Motor Vehicles, Airplanes, and Boats

1. Equity in motor vehicles, airplanes, and boats must be determined and included in the RCP. The general rule for determining NRE, as discussed in IRM 5.8.5.4.1 , Net Realizable Equity, applies when determining equity in these assets. Unusual assets such as airplanes and boats may require an appraisal to determine FMV, unless the items can be located in a trade association guide. The case file must document how the values were determined.
2. It is not necessary to personally inspect automobiles used for personal transportation. When it appears reasonable, accept the taxpayer’s stated value. If the taxpayer failed to provide the value or the value appears to be unreasonable, consult a trade association guide. Generally, the Private Party or equivalent value, not trade in value, should be used. In most cases, the vehicle will be discounted at 80 percent of FMV to arrive at the QSV.
3. Exclude $3,450 per car from the QSV of vehicles owned by individual taxpayer(s) and used for work, the production of income, and/or the welfare of the taxpayer’s family (two cars for joint taxpayers and one vehicle for a single taxpayer).

Note:

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.

Real Estate

1. Verify types of ownership through warranty and mortgage deeds.
2. The FMV of the property must be established. FMV is defined as the price at which a willing seller will sell and a willing buyer will pay for the property, given time to obtain the best and highest possible price. When a question of value arises, a discussion with the taxpayer and/or representative may be necessary to establish an accurate value. The following information, available through internal research, should be used to verify the FMV listed on the Form 433-A(OIC)/433-B(OIC) or provided by the taxpayer:

• Accurint or other online real estate database, e.g. Zillow.
• Value listed on the real estate tax assessment statement.
• Market comparable.
• Recent purchase price.

Note:

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.

Example:

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.

Note:

If internal research does not provide an accurate valuation, the OE/OS may request additional documentation including:

• An existing contract to sell.
• Recent appraisals.
• Homeowner’s insurance policy(s).

Note:

Additional documentation from the taxpayer should only be requested based on the facts and circumstances of the case.

Note:

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).

Example:

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.

Example:

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.

Example:

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.

Example:

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

Note:

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.

Accounts and Notes Receivable

1. Accounts and notes receivable are considered assets unless a determination is made to treat them as part of the income stream when they are required for the production of income. When it is determined that liquidation of a receivable would be detrimental to the continued operation of an otherwise profitable business, it may be treated as future income. See also IRM 5.8.5.15 , Income Producing Assets.
2. Accounts receivable – The value included in RCP may be adjusted based on the age of the account. Refer to IRM 5.15.1.33, Accounts and Notes Receivable, which provides information on determining the value of an account receivable. Accounts Receivable that are current (i.e. less than or equal to 90 days past due) will generally be discounted at Quick Sale Value (QSV), if the taxpayer presents accounting or industry rules or other substantiation providing for devaluation of such accounts. If the account is determined to be delinquent it may be discounted appropriately based on the age of the receivable and the potential for collection. However, supporting documentation should be provided by the taxpayer to substantiate accounts the taxpayer claims are delinquent. If the taxpayer fails to provide substantiation, the OE/OS should use good judgment to determine the appropriate value to place on the account.
3. To determine the value of accounts receivable:

1. When the receivables have been sold at a discount or pledged as collateral on a loan, apply the provisions of IRC 6323(c) to determine the lien priority of commercial transactions and financing agreements.
2. Closely examine accounts of significant value that the taxpayer is not attempting to collect, or that are receivable from officers, stockholders, or relatives.

• Whether it is secured and if so by what asset(s),
• What is collectible from the borrower, and
• If it could be successfully levied upon.

Income-Producing Assets

1. When investigating the 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 has been identified that an asset or a portion of an asset is necessary for the production of income, it is 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.
2. When valuing income-producing 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.

Exception:

Note:

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:

Example:

(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.

Note:

Example:

(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

Example:

(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.

Example:

(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.

Example:

(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.

Example:

(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.

• Type of business activity
• Taxpayer’s occupation
• Current income received from the corporation as salary and the amount of future income that the taxpayer will receive
• Current income received from corporation as dividend
• Ability of the taxpayer to sell their interest in the corporation

Example:

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.

Example:

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.

Inventory, Machinery, Equipment, and Tools of the Trade

1. Inventory, machinery, and equipment may be considered income producing assets. IRM 5.8.5.15 , Income Producing Assets, when it is determined that liquidation of these assets would be detrimental to the continued operation of an otherwise profitable business.
2. To determine the value of business assets, use the following:

• For assets commonly used in many businesses, such as automobiles and trucks, the value may be easily determined by consulting trade association guides.
• For specialized machinery and equipment suitable for only certain applications, consult a trade association guide, secure an appraisal from a knowledgeable and impartial dealer, or contact the manufacturer.
• When the property is unique or difficult to value and no other resource will meet the need, follow local procedure to request the services of an IRS valuation engineer.
• Consider asking the taxpayer to secure an appraisal from a qualified business appraiser.

Note:

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.

Note:

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.

Note:

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.

Business as a Going Concern

1. Evaluation of a business as a going concern is sometimes necessary when determining RCP of an operating business owned individually or by a corporation, partnership, or LLC. This analysis recognizes that a business may be worth more than the sum of its parts, when sold as a going concern.
2. To determine the value of a business as a going concern consider the value of assets, future income, and intangible assets such as:

• Ability or reputation of a professional.
• Established customer base.
• Prominent location.
• Well known trade name, trademark, website address, or telephone number.
• Possession of government licenses, copyrights, or patents.

Note:

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.

Note:

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.

Example:

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.

Example:

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.

Dissipation of Assets

1. Inclusion of dissipated assets in the calculation of the reasonable collection potential (RCP) is applicable in situations where it can be shown the taxpayer has sold, transferred, encumbered or otherwise disposed of assets in an attempt to avoid the payment of the tax liability. An attempt to avoid the payment of tax is normally defined as the transfer of assets for less than full value or use of proceeds (other than wages, salary, or other income) for other than the payment of items necessary for the production of income or the health and welfare of the taxpayer or their family, after the tax has been assessed or during a period of up to six months prior to or after the tax assessment.

Note:

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

Reminder:

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.

Example:

Exception:

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

• If the tax liability did not exist prior to the transfer or the transfer occurred prior to the taxable event giving rise to the tax liability, generally, a taxpayer cannot be said to have dissipated the assets in disregard of the outstanding tax liability.
• If a taxpayer withdraws funds from an IRA to invest in a business opportunity but does not have any tax liability prior to the withdrawal, the funds were not dissipated.
• Any tax paid as a result of the sale of the dissipated asset may be allowed as a reduction to the value placed on the dissipated asset.

Note:

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.

Example:

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.

Note:

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.

Note:

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.

Example:

(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.

Example:

(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.

Example:

(3) The taxpayer inherited funds and used the funds for non-priority items (other than health/welfare of the family or production of income).

Example:

(4) The taxpayer closed bank/investment accounts and will not disclose how the funds were spent or if any funds remain.

Example:

(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.

Example:

Example:

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.

Example:

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.

Example:

(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.

Example:

(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.

Example:

(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

Example:

(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.

Example:

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.

Reminder:

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.

Retired Debt

1. Retired debt is an expected change in necessary or allowable expenses. The necessary/allowable expenses may decrease, which would change the taxpayer’s ability to pay.

Example:

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.

Future Income

1. Future income is defined as an estimate of the taxpayer's ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future. See IRM 5.8.5.25 , Calculation of Future Income, table for calculation.
2. As a general rule, the taxpayer’s current income should be used in the analysis of future ability to pay. Consider all sources of current income when determining future ability to pay, refer to IRM 5.15.1.12, Determining Individual Income, for examples of income sources to include in current income.

Note:

This may include situations where the taxpayer’s income is recently reduced based on a change in occupation or employment status.

Example:

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.

Example:

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.

Note:

Example:

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.

Example:

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.

Example:

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.

Note:

This practice does not apply to wage earners. Wage earners should be based on current income unless the taxpayer has unique circumstances.

Example:

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.

Example:

(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.

Example:

(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.

Example:

(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.

Example:

(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.

Example:

(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.

Example:

(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.

Example:

(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.

Example:

(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.

Example:

(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.

Example:

(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.

Example:

(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.

Example:

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.

Future Income Collateral Agreements

1. In some instances, it may be difficult to calculate the taxpayer’s anticipated income. While the use of income averaging is one method available to calculate future earnings it may also be appropriate to use the taxpayer’s current income and secure a future income collateral agreement. The use of a future income collateral agreement will protect the government’s interest in any substantial increase in the taxpayer’s earnings.
2. A future income collateral agreement is most appropriate in situations where the taxpayer’s future income is uncertain, but it is reasonably expected that the taxpayer will be receiving a substantial increase in income.
3. A future income collateral agreement must not be used to accept an offer for a lesser amount than the calculated RCP. See IRM 5.8.6.2.1.1, Form 2261/2261-A Completion, for instructions on completing future income collateral agreements.

Example:

(1) A taxpayer is currently in medical school; upon graduation income should increase dramatically. Consider securing a future income collateral agreement.

Example:

(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.

Example:

(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.

Example:

(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.

Allowable Expenses

1. Allowable expenses consist of necessary and conditional expenses, as defined in IRM 5.15.1, Financial Analysis Handbook, and further discussed below. Use the amount shown in the expense standard schedules unless that amount would result in the taxpayer not having adequate means to provide for basic living expenses. Once allowable expenses are determined, they are used to calculate the amount that can be collected from the taxpayer's future income. See IRM 5.8.5.20 , Future Income, for additional information on future income.

Necessary Expenses

1. A necessary expense is one that is necessary for the production of income or for the health and welfare of the taxpayer's family. IRM 5.15.1, Financial Analysis Handbook, discusses the national and local expense standards, which serve as guidelines to provide accuracy and consistency in determining a taxpayer's basic living expenses. The standards are available on the IRS web site and are periodically updated.
2. Taxpayers are allowed the National Standard Expense amount for their family size, without a need to substantiate the amount actually spent. If the total amount claimed is more than the total allowed by the National Standards, the taxpayer must provide documentation to substantiate and justify that the allowed expenses are inadequate to provide basic living expenses. All deviations from the national standards must be verified, reasonable and documented in the case history.
3. National and local expense standards are guidelines. If it is determined a standard amount is inadequate to provide for a specific taxpayer’s basic living expenses, allow a deviation. Require the taxpayer to provide reasonable substantiation and document the case file. See IRM 5.15.1.8, Allowable Expense Overview.

Example:

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.

Example:

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.