Verify as much of the collection information statement (CIS) as possible through internal sources.

When internal locator services are not available, or indicate a discrepancy, request that the taxpayer provide reasonable information necessary to support the Collection Information Statement (CIS).

A full credit report should be requested prior to accepting an offer when the current balance due exceeds $100,000.

Regardless of the amount of the liability the following information sources may be considered:

Collection Information Statements (CIS) submitted with an offer in compromise should reflect information no older than the prior six months. If during the processing of the offer, the financial information becomes older than 12 months, contact should be made with the taxpayer to update the information. However, in certain situations information may become outdated due to significant processing delays caused by the Service and through no fault of the taxpayer. In those cases, it may be appropriate to rely on the outdated information if there is no indication the taxpayers overall situation has significantly changed.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 taxpayers situation may have significantly changed, secure a new CIS.

Do not make a blanket request for information. Tailor your request to each taxpayers specific situation. Do not require the taxpayer to provide information that is available from internal sources.

Offer Investigators may receive offers (other than those identified by the "Screen for Obvious Full Pay" process) where the taxpayers have not provided, either proof of payment for certain monthly expenses claimed in Section 9 of Form 433-A, or statements showing current real estate mortgage or motor vehicle loan balance. Often the taxpayers are not actually paying claimed expenses, or they are not allowable under offer program guidelines. For example, taxpayers frequently list their unsecured credit card bills under "secured debt" or " other expenses" . While a taxpayer may have a liability for a court ordered judgment that is senior to the Notice of Federal Tax Lien (NFTL), unless they are actually making payments on that liability it is not considered as an allowable monthly expense.

If taxpayers do not substantiate claimed expenses for Form 433-A categories of health care expenses, court ordered payments, child/dependent care, life insurance, other secured debt, or other expenses, Offers Investigators will complete the Income/Expense Table (IET) assuming that the taxpayer is not making any payments for the particular unsubstantiated expense, except for health care. In those cases, refer to LEM 5.3.1.

When computing equity in real estate or allowable motor vehicles, and the taxpayer has not submitted substantiation of loan balances claimed on the Form 433-A, Offers Investigators should request a credit report and use that loan balance information to determine the current balances of any relevant loans from commercial lenders. If the loan is from a private source, it may be necessary to contact the taxpayer/representative for the information.

If not present in the file when assigned for investigation, appropriate documentation from the chart below should be requested to verify the information on the Collection Information Statement (CIS).

For offer purposes, assets are valued at net realizable equity (NRE). Net realizable equity is defined as quick sale value (QSV) less amounts owed to secured lien holders with priority over the federal tax lien.

Quick sale value (QSV) is defined as an estimate of the price a seller could get for the asset in a situation where financial pressures motivate the owner to sell in a short period of time, usually 90 calendar days or less. Generally, QSV is an amount less than fair market value (FMV) but greater than forced sale value (FSV). FSV is defined as no less than 75% of FMV.

Normally, quick sale value (QSV) is calculated at 80% of fair market value (FMV). A higher or lower percentage may be applied in determining QSV when appropriate, depending on the type of asset and/or current market conditions. If, based on the current market and area economic conditions, it is believed that the property would quickly sell at full FMV, then it may be appropriate to consider QSV to be the same as FMV. This is occasionally found to be true in real estate markets where real estate is selling quickly at or above the listing price. As long as the value chosen represents a fair estimate of the price a seller could get for the asset in a situation where the asset must be sold quickly (usually 90 calendar days or less) then it would be appropriate to use of a percentage other than 80%. Generally, it is the policy of the Service to apply QSV in valuing property for offer purposes.

When a particular asset has been sold (or a sale is pending) in order to fund the offer, no reduction for quick sale value (QSV) should be made. Instead, verify the actual sale price, ensuring that the sale is an arms length transaction, and use that amount as the QSV. A reduction may be made for the costs of the sale and the expected current year tax consequence to arrive at the net realizable equity (NRE) of the asset.

When taxpayers submit separate offers but have jointly owned assets, allocate equity in the assets equally between the owners. However:

See IRM 5.8.5.3.11(4) below for the treatment of assets held as tenancies by the entirety.

When determining the reasonable collection potential (RCP) for an offer that includes business assets, an analysis is necessary to determine if certain assets are essential for the production of income. When it is determined that an asset or a portion of an asset is necessary for the production of income, it may be appropriate to adjust the income or expense calculation for that taxpayer to account for the loss of income stream if the asset was either liquidated or used as collateral to secure a loan to fund the offer .

When valuing income-producing assets:

These considerations should be fully documented in the case history. For example:

A critical part of the financial analysis is to determine what degree of control the taxpayer has over assets and income in the possession of others. This is especially true when the offer will be funded by a third party.

When these issues arise, apply the principles in IRM 5.17.1, Legal Reference Guide for Revenue Officers, or request a counsel opinion.

It is not necessary to actually seek or obtain any specific legal remedy in order to address these issues in an offer.

If the taxpayer has a beneficial interest in the asset or income stream then the value should be reflected in the reasonable collection potential (RCP).

Review checking account statements over a reasonable period of time, normally three months.

Determine the taxpayers interest in bank accounts by ascertaining the manner in which they are held and applying the principles described in IRM 5.17.1, Legal Reference Guide for Revenue Officers.

If analysis of the bank statements and/or discussions with the taxpayer reveal that an adjustment to the balance is appropriate based on unusual expenses that are necessary for the production of income or the health and welfare of the taxpayer, consider adjusting the balance. The case file should clearly document these determinations.

Analyze the statement for any unusual activity, i.e. deposit in excess of reported income, withdrawals, transfers, or checks for expenses not reflected on the Collection Information Statement (CIS). The Offer Investigator should question these inconsistencies, as appropriate.

Review savings accounts statements over a reasonable period of time, normally three months.

If analysis of the bank statement reveals recently dissipated funds, see 5.8.5.4 below for a full discussion of the treatment of dissipated assets.

If the taxpayer offers the balances of accounts to fund the offer, allow for any penalty for early withdrawal and the expected current year tax consequence.

Verify whether deposits in escrow or trust accounts are actually held for the benefit of others.

For funds on deposit with the offer in compromise, allow as an encumbrance any amount borrowed under the provision that, if the offer is not accepted, it must be repaid.

Financial securities are considered an asset and their value should be determined and included in the reasonable collection potential (RCP) when investigating an offer.

When the taxpayer will liquidate the investment to fund the offer, allow any penalty for early withdrawal and the current year tax consequence.

To determine the value of publicly traded stock, research a daily paper or inquire with a broker for the current market price. Then, allow for the estimated costs of the sale to arrive at the quick sale value (QSV).

To determine the value of closely held stock that is either not traded publicly or for which there is no established market, consider the following methods of valuing the company and assign a proportion of the company's value to the taxpayers stock:

When a taxpayer holds only a negligible or token interest, has made no investment and exercises no control over the corporate affairs, it is permissible to assign no value to the stock.

Life insurance as an investment is not considered necessary. However, reasonable premiums for term life policies may be allowed as a necessary expense.

When determining the value in a taxpayers insurance policy, consider:

Funds held in a retirement or profit sharing plan are considered an asset and must be valued for offer purposes.

Contributions to voluntary retirement plans are not a necessary expense. Review of the retirement plan document is generally necessary to determine the taxpayers benefits and options under the plan.

When determining the value of a taxpayers pension and profit sharing plans consider:

When the taxpayer will liquidate the retirement plan to fund the offer, allow any penalty for early withdrawal and the current year tax consequence.

When the taxpayer will borrow against the retirement plan to fund the offer, allow any penalty for early withdrawal and the current year tax consequence.

The taxpayers declared value of household goods is usually acceptable unless there are articles of extraordinary value; such as, antiques, artwork, jewelry, or collector's items. Exercise discretion in determining whether the assets warrant personal inspection.

There is a statutory exemption from levy that applies to the taxpayers furniture and personal effects. This exemption amount is updated on an annual basis.

When determining the value consider the following:

Equity in motor vehicles, airplanes, and boats must be determined and included in the reasonable collection potential (RCP). The general rule for determining net realizable equity (NRE), as discussed in IRM 5.8.5.3.1 above, applies when determining equity in these assets. Unusual assets such as airplanes and boats may require an appraisal to determine fair market value (FMV), unless the items can be located in a trade association guide. The case file should document how the values were determined.

Generally, it is not necessary to personally inspect automobiles used for personal transportation. When it appears reasonable, accept the taxpayers stated value. No further investigation is required except for vehicles that are three years old or newer with no lien. For these vehicles, consult a trade association guide and discount the fair market value (FMV) to 80% to arrive at the quick sale value (QSV).

When these assets are used for business purposes they may be considered income producing assets. See IRM 5.8.5.3.3 above for a full discussion on the treatment of income producing assets.

Equity in real estate is included when calculating the taxpayers reasonable collection potential (RCP) and in an acceptable offer amount.

When determining equity in real estate, the fair market value (FMV) of the property must be established. FMV is defined as the price a willing buyer will pay for the property, given time to obtain the best and highest possible price. The following methods may be used to establish FMV:

Once the fair market value (FMV) of real estate is established, a determination regarding a reduction of value for offer purposes must be made. Procedures outlining reduction to quick sale value (QSV) are discussed in IRM 5.8.5.3.1 above. If the value of real estate is reduced beyond 80% or if FMV is not reduced to QSV, the case file should document the basis for the value used.

For real estate and other related property held as tenancies by the entirety when the tax is owed by only one spouse, the taxpayers portion is usually 50% of the property's net realizable equity (NRE).

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.

To determine the value of accounts receivable:

To determine the value of a note receivable, consider the following:

Inventory, machinery and equipment may be considered income producing assets. See IRM 5.8.5.3.3 above when it is determined that liquidation of these assets would be detrimental to the continued operation of an otherwise profitable business.

To determine the value of business assets use the following:

There is a statutory exemption from levy that applies to an individual taxpayers tools used in a trade or business. This exemption for tools of the trade generally does not apply to automobiles. The levy exemption amount is updated on an annual basis.

Evaluation of a business as a going concern is sometimes necessary when determining reasonable collection potential (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.

To determine the value of a business as a going concern consider the value of assets, future income, and intangible assets such as:

Generally, the difference between what an ongoing business would realize if sold on the open market as a going concern and the traditional reasonable collection potential (RCP) analysis is attributable to the value of these intangibles.

Request the assistance of an IRS valuation engineer when a difficult or complex valuation is necessary.

When determining reasonable collection potential (RCP) for an individual taxpayer that has an interest in a business entity, flexibility should be used with consideration given to the taxpayers control over the business.

Allowable expenses as defined in IRM 5.15.1, Financial Analysis Handbook, are those expenses that are necessary for the production of income or for the health and welfare of the taxpayers family. That handbook also contains national and local standard expense amounts designed to provide accuracy and consistency in determining a taxpayers basic living expenses. The standards are updated periodically based upon Bureau of Labor Statistics and Census Bureau information.

National and local expense standards are guidelines. If it is determined that a standard amount is inadequate to provide for a specific taxpayers basic living expenses, allow a deviation. Require the taxpayer to provide reasonable substantiation and document the case file.

Generally, the total number of persons allowed for national standard expenses should be the same as those allowed as dependents on the taxpayers current year income tax return. There may be reasonable exceptions. Fully document the reasons for any exceptions.

A deviation from the local standard is not allowed merely because it is inconvenient for the taxpayer to dispose of excessively valued assets. In some situations, taxpayers may be expected to make life-style choices that will facilitate collection of the delinquent tax.

Transportation expenses are considered necessary when they are used by taxpayers and their families to provide for their health and welfare and/or the production of income. Employees investigating offers in compromise are expected to exercise appropriate judgment in determining whether claimed transportation expenses meet these standards. Expenses that appear to be excessive should be questioned and, in appropriate situations, disallowed.

Operating Expenses — Allow the full operating costs portion of the local transportation standard, or the amount actually claimed by the taxpayer, whichever is less .

Ownership Expenses — Expenses are allowed for purchase and/or lease of a vehicle, with different rates established for a first car and, if allowed, a second or more cars.
Taxpayers will be allowed the local standard or the amount actually paid, whichever is less. Generally, auto loan and/or lease payments will not continue as allowed expenses after the terms of the loan/lease have been satisfied. However, depending on the age and/or condition of the vehicle, the complete disallowance of the ownership expense may result in a transportation expense allowance that does not adequately meet the necessary expenses of the taxpayer.
Therefore, in situations where the taxpayer owns a vehicle that is currently over six years old and/or has reported mileage of 75,000 miles or more, an additional operating expense of $200 will generally be allowed for the collection period that remains after the loan/lease has been "retired" plus the operating expense.

Conditional expenses are defined in IRM 5.15, Financial Analysis Handbook, as those that may be allowed when the tax will be paid in full by an installment agreement. For offers purposes, the full amount of the tax will not be collected; therefore, the rules for conditional expenses are different.

The one year rule which allows time for a taxpayer to adjust current expenses to meet the terms of an installment agreement is not allowed for Offers in Compromise.

The purchase of discretionary investments is not allowed.

Repayment of loans incurred to fund the offer and secured by the taxpayers’ assets are allowed when those assets are of reasonable value and necessary to provide for the health and welfare of the taxpayers family. The same rule applies whether the equity is paid to tax before the offer is submitted or will be paid upon acceptance of the offer. See IRM 5.8.5.3.3, Income-Producing Assets, to determine when to allow repayment of loans on those assets used to fund the offer.

Repayment of student loans secured by the federal government is allowed only for the taxpayers higher education. If student loans are owed but no payments are being made, do not allow them.

Education expense is allowed only for the taxpayer and only if it is required as a condition of present employment. Expenses for dependents to attend colleges, universities or private schools are not allowed unless the dependents have special needs that cannot be met by public schools.

Child support payments for natural children or legally adopted dependents may be allowed, based on the taxpayers situation, even when they are not court ordered. Regardless of whether they are court ordered, if no child support payments are being made, do not allow them.

Monthly payments to state or local taxing agencies should not be allowed as a necessary expense, even if the state or local taxing agency has a lien that was choate prior to our lien or is collecting funds via a wage attachment or approved installment agreement. State and federal lien (regardless of priority) attach simultaneously to after acquired property. In general, if the federal tax lien attaches to after acquired property simultaneously with a competing perfected lien, the federal tax lien will take priority (see IRM 5.17.2, Legal Reference Guide). Since future earnings of the taxpayer are after acquired property the Service has first right to the earnings. Explain to the taxpayer that although the payment may be allowed in an installment agreement where the tax will be paid in full, it will not be allowed for computation of an acceptable offer amount because the Federal government has priority rights to the funds.

Charitable contributions are not allowed.

Payments being made to fund or re-pay loans from voluntary plans will not be allowed. Taxpayers who cannot repay these loans will have a tax consequence in the year that the loan is declared in default and that consequence should be estimated and allowed as an additional tax expense on the IET for the required number of months necessary to cover the additional tax consequence. Request the taxpayer or their representative estimate the tax ramification of the failure to re-pay the loan or the Offers Investigator may request assistance from the Examination function or Customer Service to determine the tax consequences.

This situation can happen one of two ways:

Generally, the assets and income of a not liable person are excluded from the computation of the taxpayers ability to pay. One notable exception is in community property states. Follow the community property laws in these states to determine what assets and income of the otherwise not liable person are subject to collection of the tax.

Regardless of community property laws, the Offers Investigator should secure sufficient information concerning the not liable person to determine the taxpayers proportionate share of the total household income and expenses. Review the entire household's information and:

When the taxpayer can provide documentation that income is not commingled (as in the case of roommates who share housing) and responsibility for household expenses are divided equitably between co-habitants, (as documented by rental agreements, bank statement analysis, etc.) the total allowable expense should not exceed the total allowable housing standard for the taxpayer. In this situation, it would not be necessary to obtain the income information of the non-liable person(s), however sufficient financial information must be secured to verify the total household expenses and prove that the taxpayer is paying his/her proportionate share. The investigating employees should exercise sound judgment in these situations to determine which approach is most appropriate, based on the facts of each case.

Generally, the amount to be collected from future income is calculated by taking the projected gross monthly income less allowable expenses and multiplying the difference times the number of months remaining on the statutory period for collection.

For cash and short term deferred offers, when there are less than 48 or 60 months remaining on the statutory period for collection, use the number of months remaining. To determine the amount collectible from future income on a deferred payment offer through the life of the statutory period for collection, take the following steps:

Taxpayers that previously extended the Collection Statute Expiration Date (CSED) in connection with an installment agreement, may request approval of a deferred payment offer in compromise (DPOIC).

On March 24, 1998 the Service issued procedures that limited the length of CSED extensions. See IRM 5.14, Installment Agreements , for further instruction on the policy of the Service.

By policy, if extensions granted prior to October 18, 1999:

IDRS will not reflect any adjustments based on these procedures; therefore, it is essential that case histories be fully documented and reflect the following statement:

"Time left prior to the CSED (per IDRS) was not used for computation of the deferred offer payment amount, per IRM 5.8.5.5.6. "