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.