What Forms Are Needed for an IRS Offer in Compromise?
You know how the IRS likes its paperwork, and it is no different when you apply for an Offer in Compromise (OIC). Face it, IRS forms are onerous and the instructions they provide usually shed little light.
In this chapter, I am going to walk you through the various forms and schedules you need to apply for an OIC.
We will hone in on specific questions and sections on the forms where you need to pay close to attention to how you answer them. It will truly make a substantial difference in the IRS’ decision to accept or deny your request.
As you read through this chapter, if you have any questions, make note of them. I have provided links to the IRS website where you can find the forms in their entirety along with the instructions. I also explain the national and local standards that the IRS uses to determine your reasonable living expenses.
These calculations determine how much you can be expected to pay towards your tax debt. Your future potential income is also factored into the final determination.
If you have questions or need help in interpreting and completing the forms, give us a call. Our team has years of experience in assisting clients with preparing their OIC applications packages and have a proven track record of success to back us up.
So, we will start at the beginning …
IRS Form 433-A OIC Breakdown
IRS Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals is used to collect financial information about the taxpayer and the taxpayer’s ability to repay a current tax liability.
Major Sections of the IRS Form 433-A OIC:
- Section 1: Personal Information
- Section 2: Employment Information for Wage Earners
- Section 3: Other Financial Information
- Section 4: Personal Asset Information for All Individuals
- Section 5: Monthly Income and Expenses
- Section 6: Business Information
- Section 7: Sole Proprietorship Information
Section one of the IRS Form 433-A OIC requests general information specific to the taxpayer. Request for information includes full name, marital status, address, and phone numbers.
Section two also requests general information with regard to the taxpayer’s employment status. In this section, the taxpayer will be asked about how many withholding allowances claimed on Form W-4, pay period, and occupation.
Questions located in section three of the IRS Form 433-A OIC focus on other types of non-wage-earning information. For example, a taxpayer will be expected to disclose information about current lawsuits; bankruptcy filings; foreign residency status; beneficiary of trust, estate, or life insurance policy, safe deposit boxes and recent asset transfers.
In section four, taxpayers must disclose information with regard to current cash on hand in terms of personal bank accounts, investments, available credit on bank issued credit cards, real property, personal vehicles leased and/or purchased, personal assets, and total equity.
In section five, the taxpayer must disclose wages, salaries, pensions, social security, net income from business, net rental income, other income (i.e., unemployment compensation, gambling income, oil credits, and subsidies), expenses not generally allowed specific to private school, public/private college expenses, charitable contributions, voluntary retirement contributions, or payments on unsecured debts.
Other items that must be disclosed include food, clothing, and other miscellaneous expenses. Other expenses, housing costs, utilities, vehicle ownership costs, vehicle operating costs, public transportation, out of pocket health care costs, and current year taxes are also included.
Sections six and seven are to be completed by taxpayers who are self-employed. In section six, taxpayers must disclose their type of business, payment processing tools, credit cards accepted by the business, business bank accounts, accounts/notes receivables and business assets.
Section seven requests information about the current accounting method used, total monthly business income and total monthly business expenses. Taxpayers must know their company’s net business income.
IRS National Standards
The IRS has developed IRS national standards as guides for taxpayers responsible for resolving their tax liabilities. The IRS national standards, which come from the IRS Collection Financial Standards, are defined as five categories of necessary expenses developed and used by the IRS to calculate a taxpayer’s payment potential.
The standards are used for the purpose of calculating repayment of federal tax liability. The national standards have been established for five necessary expenses:
- housekeeping supplies,
- apparel and services,
- personal care products and services, and
For example, under the category of food, the IRS allows for calculations of both food at home and food away from home. The IRS treats “food at home’ as referring to the total expenditures for food from grocery stores or other food stores. “Food away from home” is treated as including all meals and snacks, including tips, at fast-food, take out, delivery and full-service restaurants.
The IRS defines housekeeping supplies as those items necessary for carrying on daily life. They include stationery supplies, postage, delivery services, miscellaneous household products and lawn and garden supplies.
Apparel and services include clothing, footwear, watches and jewelry. They also include the material for making clothes, supplies for alterations and repairs, and dry cleaning.
Personal care products and services include a list of items used in the hair, oral hygiene products and shaving needs. They are also extended to cosmetic and bath products and related personal care products, which also include electronic personal care appliances.
The miscellaneous allowance includes credit card payments, bank fees and charges, school supplies, and reading material.
The IRS allows taxpayers to calculate their respective IRS national standards by family size. However, if the amount claimed is more than the total allowed by the National Standards for food, housekeeping supplies, apparel and services and personal care products and services, the taxpayer must provide documentation to substantiate that those expenses are necessary living expenses.
The total number of persons considered in terms of National Standards should figuratively represent the same number allowed as exemptions on the taxpayer’s income tax return.
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IRS Local Standards
The IRS Collection Financial Standards are also extended to local territories. The IRS Local Standards provide guidelines regarding how to account for housing and utilities. Housing and utilities calculations are based upon state, county, and family size.
In addition, IRS Local Standards also include transportation standards. For example, in terms of ownership costs, single taxpayers are allowed one automobile. Taxpayers are allowed operating costs by regional and metropolitan area.
There is a single allowance for public transportation. The single nationwide allowance for public transportation is based upon Bureau of Labor Statistics expenditure data for mass transit fares for a train, bus, taxi, ferries, and other public transits. Taxpayers with no vehicle are allowed the standard amount monthly, per household, without any questioning into the amount actually spent.
In the case of taxpayers who use both their personal vehicles and public transportation, the IRS may allow expenses for both, provided that the need is for the health and welfare of the family and contributes to the production of income.
Specific costs and more information about IRS Local Standards can be found on the IRS website.
Income and Expense Table and Future Income
The IRS Income Expense Table
Similar to the asset/equity table, the IRS income and expense table (IET) outlines necessary living expenses, where the taxpayer lists both total income and expenses. The IRS income and expense table are divided into two major categories where the taxpayer eventually calculates the net difference multiplied by one or more amounts to get to an amount that could be paid from their future income.
Under the total income column, taxpayers must provide information with regard to the following:
- Wages (spouse)
- Interest – dividend
- Net business income
- Net rental income
- Pension/Social Security (taxpayer)
- Social Security (spouse)
- Child support
- Other income if applicable
Taxpayers calculate amounts and list the total income in the first column of the IRS income and expense table. In the second column, taxpayers provide information concerning necessary living expenses — those claimed and those allowed.
Necessary living expenses are defined as those that are required for living and carrying on daily life. Food, clothing, housing, utilities, vehicle operating costs, health insurance, out-of-pocket healthcare costs, child/dependent care, current year income taxes, state and local taxes and secure debts are considered necessary living expenses.
Other expenses, such as charitable contributions, education, credit cards, and voluntary retirement allotments are generally not considered as necessary living expenses under the IET. The IET is useful in helping taxpayers calculate both the amount that could be paid in the future and the amount that could be paid in general.
Future Income Potential
Future income potential within the context of tax law and the IRS income and expense table is defined as the ability of the taxpayer to generate earnings through physical exertion. In addition, future income potential also refers to the ability of the taxpayer’s assets to generate a return on investment.
Within the context of investing, future income potential refers to earning potential as well as the upside of a particular product generating earnings. The earning potential of an investment represents the largest possible profit made by a corporation and is usually passed on as dividends to the investors.
For more information about earning potential, review the Investopedia definition. The link is available here: https://www.investopedia.com/terms/e/earning-potential.asp
Other Collections Forms if an Offer in Compromise is Not An Option
Taxpayers can use Form 9465, Installment Agreement Request to request consideration for a monthly installment plan if they cannot pay the full amount shown on the tax return. Taxpayers making payments on a current installment agreement cannot use Form 9465.
The IRS uses Form 433-F, Collection Information Statement to obtain current financial information for a wage earner or self-employed individual to determine if the taxpayer can satisfy an outstanding liability.
The form is divided into eight sections. Taxpayers are required to list all accounts and/or lines of credit and information pertaining to wage earning.
- Section A – Accounts/Lines of Credit
- Section B – Real Estate
- Section C – Other Assets
- Section D – Credit Cards
- Section E – Business Information
- Section F – Employment Information
- Section G – Non-Wage Household Income
- Section H – Monthly Necessary Living Expenses
Accounts and lines of credit also include reports of stocks and bond holdings. You must list all real estate you currently own and/or plan on purchasing. You will need the county description. To determine equity, the IRS will subtract the amount owed for each piece of real estate from its current market value.
Other assets include the ownership of cars, boats, recreational vehicles; insurance policies; paintings, coin collections, or antiques; and business assets such as tools, equipment, inventory, and intangible assets such as domain names, patents, and copyrights.
To determine equity, the IRS will subtract the amount owed from its current market value.
List all credit cards whether you have a balance or not. In addition, you must list accounts receivables owed to your business as well as information about business credit cards.
Section F requires that you include employment information. On the other hand, Section G requires that you list non-wage income. According to Form 433-F, non-wage income may include net self-employment income, net rental income, and other income reported as distributions from partnerships and subchapter S corporations.
Other income also includes agricultural subsidies, unemployment compensation, gambling income, oil credits, rent subsidies, Social Security and interest dividends, IRAs, and pension income. This list is not comprehensive.
Lastly, monthly necessary living expenses are those figures for housing and utilities, rent, transportation, public transportation, medical, health insurance, out-of-pocket health care expenses, child/dependent care, estimated tax payments, life insurance, delinquent state and local taxes, student loans, court ordered payments, and other expenses as determined acceptable by an IRS collections representative.
The Keys to an IRS OIC Presentation
Filling out IRS paperwork is a hassle and nobody likes doing it. However, if you want to have your OIC approved the first time, you need to grit your teeth and just do it.
Accuracy is everything. Take the time to carefully read the instructions and complete the forms to your best knowledge. Gather any documents you need, like bank statements, to support your claims.
I can not stress this enough. If it is “location, location, location,” for real estate, it is “presentation, presentation, presentation” with the IRS. Please print your forms neatly and legibly. Organize all of your documentation and put everything together in a manner so that the IRS representative who is reviewing your application has everything they need at their fingertips.
My clients have successfully used this simple tip when preparing for audits and it can work when preparing your OIC request.
I hope you found this chapter helpful. If you have any questions or need help preparing the forms, give us a call.