5.8.5. Financial Analysis

(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.

(2) Audience: These procedures apply to Internal Revenue Service (IRS) employees who are responsible for investigating offers and to other employees who may review or consider a taxpayer’s appeal of an offer:

• 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.

(3) Policy Owner: Director, Collection Policy, SBSE.

(4) Program Owner: Collection Policy SBSE, Offer in Compromise (OIC) Program.

(5) Primary Stakeholders: COIC and FOIC employees.

(6) Program Goals: Policy Statement 5-100 explains the objective of the OIC as a collection tool. This Internal Revenue Manual (IRM) section provides the fundamental knowledge and procedural guidance for offer examiners and offer specialists engaged in the investigation of offers. The procedures in this IRM include guidance so employees will be able to complete offer investigations and initiate taxpayer contact, when appropriate. By following the procedures in this IRM, employees will be able to conduct an appropriate financial analysis to support an offer in compromise determination.

(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.

(3) If the initial calculation indicates the taxpayer can full pay through a lump sum payment, installment agreement, or a combination of both, contact the taxpayer to discuss withdrawing the offer and entering an alternative resolution. If the taxpayer does not withdraw the offer or provide a response that changes the full pay determination, follow the procedures in IRM 5.8.7.7, Rejection, to reject the offer.

(4) If the initial calculation indicates the taxpayer cannot full pay based on installment agreement guidelines or by utilizing equity in assets, continue the investigation to determine the reasonable collection potential (RCP). Refer to IRM 5.8.4.3, Doubt as to Collectibility, involving situations when the calculated amount potentially received through a Partial Payment Installment Agreement (PPIA), which does not full pay the liability, is substantially more than the amount of the offer.

(5) Document the history supporting your determination of the taxpayer’s ability to full pay the tax liability including any accrued interest and penalties.

(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.

(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.

(2) For an ongoing business, field calls may be made to validate the existence and value of business assets and inventory. This may require an Other Investigation (OI) to a Collection Field revenue officer. If a field call has been previously made and assets have been valued and documented, a field call would not be required. The offer specialist should make the field call, if practical and managerial approval received, or initiate an OI to request that a field call be made by another RO if the taxpayer operates outside the offer specialist's commuting area. Refer to IRM 5.8.4.22.3, Offers from Operating Businesses, for situations in which a field call is required.

(3) Field calls may be made on non-operating businesses or individual cases after all internal research has been exhausted. In those cases, a Form 2209 or ICS Other Investigation may be issued. Issuance of other investigations in these instances will be rare.

(4) Do not eliminate assets or value them at zero dollars simply because the taxpayer is unable to borrow against the equity in the asset or the IRS chooses not to take enforcement action against the asset. However, in some situations based on the facts of the case, special circumstances may be present that will allow an offer to be accepted for less than RCP, in accordance with IRM 5.8.11, Effective Tax Administration.

(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:

(3) Do not allocate a disproportionate share of equity in jointly held assets and future income value (FIV) to separate offers. The allocation of joint equity and FIV should approximate the percentage of the liability owed by each taxpayer and the allocation amount must not exceed the liability owed for the periods listed on either offer.

(4) For property held as tenancies by the entirety when the tax is owed by only one spouse, the taxpayer’s portion is usually 50 percent of the property’s NRE. See also IRM 5.8.5.13, Real Estate.

(5) It may be necessary to review applicable state law, including the effect community property and registered domestic partnership laws have on property ownership rights to determine the taxpayer’s interest in assets that should be included in RCP.

(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.

(3) If the taxpayer has a beneficial interest in the asset or income stream, reflect the value of the interest in the RCP. Document the valuation and reason for including any assets held by a transferee, nominee or alter ego, including the identification of any documents which substantiate the determination. Contact the taxpayer/representative to discuss the findings, preferably by telephone to expedite the process, and if necessary, request any additional documents or verification. This may require the taxpayer to submit completed financial statements for the entity identified.

(4) If the taxpayer is unwilling or unable to provide the financial information requested; consider assigning a value based on available information. If unable to assign a value because information necessary to determine whether the taxpayer’s offer should be accepted is not provided, consider a return as discussed in IRM 5.8.7.2.2.4, Return for Failure to Provide Information. The return recommendation must include a thorough discussion on the reasons for returning the taxpayer's offer including the documents requested and why they are necessary to make the offer recommendation.

(5) Prior to returning an offer because documents relating to the transferee/nominee/alter ego issue(s) are not submitted, review documents already provided by the taxpayer and consider if the existing information is sufficient to calculate the RCP. Document the valuation and reason for including any assets held by a nominee or alter ego, including the identification of any documents which substantiate the determination. If the value of the taxpayer's assets, other than transferred property, alter-ego, or nominee is greater than the offer amount, recommend the offer for rejection. If a rejection recommendation is made, the taxpayer’s failure to provide requested information and discussion of the transferee/nominee issues must be included in the closing narrative in the ICS history or AOIC remarks. Additionally, an estimated value of the transferree/alter-ego/nominee property must be included on the asset/equity table (AET).

(6) If the taxpayer does not respond to a request for verification of possible additional income and the offer has already been determined to be a full pay based on assets or income not related to the transferred property, alter-ego, or nominee, proceed with rejection of the offer. If a rejection recommendation is made, the taxpayer’s failure to provide requested information and discussion of the transferee/nominee/alter ego issues must be included in the recommendation narrative, including placing an estimated value of the income on the income/expense table (IET) and/or assets on the AET.

(7) It is not necessary to actually seek or obtain any specific legal remedy in order to address these issues in an offer. However, the offer file must be clearly documented with the basis for including the value of a transferred asset, an alter-ego, or a nominee asset in the RCP. Care should be taken so that the determination to include assets held by others is reasonable. Document the case decision.

(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.

(2) Use the amount listed on the Form 433-B(OIC) for the amount of cash in the taxpayer’s bank account.

(3) Review checking account statements over a reasonable period of time, generally three months for wage earners and six months for taxpayers who are non wage earners. Look for any unusual activity, such as deposits in excess of reported income, large withdrawals, transfers to/from other accounts, or checks for expenses not reflected on the CIS. The review may also determine mortgage or car payments listed on the CIS are not reflected on the bank statement. Discuss any inconsistencies with the taxpayer.

(4) If the review of the taxpayer’s account shows a substantial difference between the Form 433-A(OIC) and/or Form 433-B (OIC) and the bank statement value, adjust the amount shown on the AET after discussion with the taxpayer, if applicable.

(5) Review savings account statements over a reasonable period of time, generally three months.

• 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.

(6) If the review of the taxpayer’s account identifies peer to peer payment applications being used (e.g. Venmo, Zelle, Cash App, etc.) or transfers to or from online gambling applications request account or activity statements to verify any amount of cash being held in these accounts. Use the ending balance on the latest statement as the asset value for the AET.

(7) If analysis of the bank statement reveals large amounts of recently expended funds, see IRM 5.8.5.18, Dissipation of Assets, for a full discussion of the treatment of dissipated assets.

(8) If the taxpayer offers the balances of accounts (for example, certificate of deposit, savings bonds, etc.) to fund the offer, allow for any penalty for early withdrawal and the expected current year tax consequence.

(9) Document AOIC or ICS with how the value of cash listed on the Asset/Equity Table was determined.

(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.

(6) 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.

(7) Additional considerations involving offers from closely held entities, S Corps, Partnerships, LLCs, or individuals with interests in these entities:

• 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.

(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:

(4) Reasonable premiums for term life policies will be allowed as a necessary expense. Verify the amount of the premiums and ensure payments are being made.

(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:

(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.

(3) When determining the value consider the following:

(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).

(4) When these assets are used for business purposes, they may be considered income producing assets. See also, IRM 5.8.5.15, Income Producing Assets, for a full discussion on the treatment of income producing assets.

(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.

• An existing contract to sell.

• Recent appraisals.

• Homeowner’s insurance policy(s).

(3) Once the FMV of real estate is established, a determination regarding a reduction of value for offer purposes must be made. Procedures outlining reduction to QSV are discussed in IRM 5.8.5.4.1, Net Realizable Equity.

(4) Equity in real estate is included when calculating the taxpayer's RCP in an acceptable offer amount. See IRM 5.8.5.15, Income Producing Assets, relating to taxpayers whose sole business is real estate rental/leasing and/or development.

(5) Document what methods were used in determining the value of the property and the reason for applying any value other then the QSV.

(6) For real estate and other related property held as tenancies by the entirety when the tax is owed by only one spouse, the taxpayer's portion is usually 50 percent of the property's NRE.

(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.

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

• 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.

(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:

(3) As a general rule, equity in income producing assets will not be added to the RCP of a viable, ongoing business; unless it is determined the assets are not critical to business operations.

(4) Based on the taxpayer's specific circumstances, there may instances where the income producing assets in a Subchapter S corporation may be treated similar to assets owned by a taxpayer's sole proprietorship business. Factors to consider include:

• 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

(5) When considering equity in income producing assets and the effect on income streams and expenses, you must exercise sound judgment consistent with the unique facts of each case.

(6) Each case must be thoroughly documented regarding equity decisions in income producing property.

(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.

(3) There is a statutory exemption from levy that applies to an individual taxpayer's tools used in a trade or business, which will be allowed in addition to any encumbrance that has priority over the NFTL.

(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.

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

(4) When determining the equity to include in RCP for an individual taxpayer who has an interest in a business entity, consideration should be given to the taxpayer's control over the business.

(5) Generally, the value of a business as a going concern would not be included in RCP of a viable, ongoing business, unless the value is substantially greater than the income produced by the business.

(6) Clearly document the justification for the value used in the case history.

(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.

(2) Generally, a three year time frame will be used to determine if it is appropriate to include a dissipated asset in RCP. Include the year of submission as a complete year in the calculation.

• 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.

(3) If it is determined inclusion of a dissipated asset is appropriate and the taxpayer is unwilling or unable to include the value of the dissipated asset in the offer amount, the offer should be rejected, yet if the inclusion of the dissipated asset is the reason for the offer rejection, then the basis for rejection must be not in the best interest of the government. Although the offer may be rejected under not in the best interest of the government criteria, a calculation of an acceptable offer amount based on the equity in assets, the value of future income, and the amount attributable to the dissipated asset(s) must be provided with the rejection recommendation.

(4) See below for examples of the types of situations where it may be appropriate to include, or not include, the value of an asset in the calculation of RCP. The examples provided are not meant to be all inclusive as each case must be evaluated on its own merit.

(5) Examples of situations in which the value of an asset should be included in RCP include, but are not limited to:

(6) Situations may occur in which the transfer happened over 3 years prior to the offer submission, yet because of the timing of the transfer (within six months prior to or six months after the tax assessment or after notification of an examination), the inclusion of the asset in RCP may be appropriate

(7) Examples of situations in which the value of an asset should NOT be included in RCP, include but are not limited to:

(8) Prior to including the dissipated asset in the RCP, the taxpayer should be contacted (preferably by telephone) and afforded the opportunity to explain or verify the dissipation of the asset.

(9) Clearly document the case history with the basis for your decision regarding the dissipated asset.

(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.

(2) Inclusion of retired debt should not be automatically included in the calculation of the RCP. Use judgment in determining whether inclusion of the retired debt is appropriate based on the facts of the case; such as special circumstances or ETA situations.

(3) Do not retire loan payments on a vehicle.

(4) The case histories must be documented to support the inclusion or exclusion of the retired debt.

(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.

(3) Give consideration to the taxpayer's overall general situation including such facts as age, health, marital status, number and age of dependents, level of education or occupational training, and work experience.

(4) Situations that may warrant placing a different value on future income than current or past income indicates are discussed in the table below. Additionally, securing a future income collateral agreement based on the taxpayer’s earnings potential may be appropriate and are discussed in more detail in IRM 5.8.5.21, Future Income Collateral Agreements, and IRM 5.8.6, Collateral Agreements.

(5) Use judgment in determining the appropriate time to apply income averaging on a case by case basis. Consider all circumstances of the taxpayer when determining the appropriate application of income averaging, including special circumstances and ETA considerations. Below are some examples of when income averaging may not be appropriate.

(6) In situations where the taxpayer’s income does not appear to meet their stated living expenses the difference will not be included as additional income to the taxpayer, unless there are clear indications additional income not included on the collection information statement is being received and will continue to be received by the taxpayer. Discussion with the taxpayer/POA and a review of documents submitted by the taxpayer must take place to determine how the taxpayer is paying current expenses and the appropriateness of including an additional amount in the calculation of future income. Verification of the source of unexplained bank deposits or statements from the source of gifts may be required to correctly determine the taxpayer’s current income. Telephone or contact via Secure Messaging is recommended to expedite the case processing.

(7) The taxpayer’s situation may require an adjustment to income during the term of future income calculation or when determining if the taxpayer can fully pay the liability under current installment agreement (IA) guidelines.

(8) Exercise good judgment when determining future income. The history must be clearly documented and support the known facts and circumstances of the case and include analysis of the supporting documents. Each case needs to be evaluated on its own particular set of facts and circumstances. The history must clearly explain the reasoning behind our actions.

(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.

(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.

(1) Conditional expenses are defined in IRM 5.15.1, Financial Analysis Handbook, as those that may be allowed when the tax will be paid in full by an installment agreement within 6 years. For offer purposes, the full amount of the tax will not be collected, therefore, the rules for conditional expenses do not apply. However, an offer may be accepted for less than the RCP when special circumstances are present in accordance with IRM 5.8.11, Effective Tax Administration.

(2) 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.

(3) The purchase of discretionary investments is not allowed in the calculation of the RCP.

(1) Generally, a taxpayer will be allowed only the expenses the taxpayer is required to pay. Consideration must be given to situations where the taxpayer shares expenses with another. Shared expenses may exist in one of two situations:

• An offer is submitted by a taxpayer who shares living expenses with another individual who is not liable for the tax.

• Separate offers are submitted by two or more persons who owe joint liabilities and/or separate liabilities and who share the same household.

(2) Generally, the assets and income of a not liable person are excluded from the computation of the taxpayer’s ability to pay. Treasury Reg. 301.7122-1(c)(2)(ii)(A) only applies in non-liable situations.

(3) Below are some examples of joint and separate liabilities.

(4) The OE/OS should secure sufficient information concerning the non-liable person’s assets and income to determine the taxpayer’s proportionate share of the total household income and expenses. Review the entire household's information and:

1. Determine the total actual household income.

2. Determine what percentage of the total household income the taxpayer contributes.

3. Determine allowable expense amounts using the rules in this chapter and IRM 5.15.1, Financial Analysis Handbook.

4. Determine which expenses the taxpayer and others have agreed to share, e.g., taxpayer and non-liable spouse pay their expenses from joint checking account. If there is no agreement, then the expense isn't shared, as is typical for child support, allowable educational loan, or union dues.

5. Apply the taxpayer's percentage of income to the shared expenses.

6. Verify that the taxpayer actually contributes at least this amount to the total household expense. National Standard expenses do not require verification unless the taxpayer claims more than the standard amount.

7. Do not allow the taxpayer any amount paid toward the non-liable person's discretionary expenses.

(5) Shared expense calculations between spouses are used when the parties live in a separate property state or state law permits the parties to separate their incomes and the non-liable spouse does not agree to have their income considered in the repayment of the liable spouse’s tax debt, refer to IRM 5.15.1.5, Shared Expenses. If the non-liable spouse does not agree to have their income considered in the repayment amount, determine the income percentages as stated in paragraph (4).

(6) After determining the percentage of income of the liable taxpayer, that percentage is multiplied against the ALE standard amounts for the household, refer to IRM 5.15.1.5, Shared Expenses. If the taxpayer’s calculated percentage amount for National Standards for Food, Clothing and Other Items and for Out-of-Pocket Health Care Costs, is less than the standard amount for one person, the liable taxpayer will be allowed the standard amount. For the other ALE expenses (Transportation and Housing/Utilities), allow the liable taxpayer the calculated percentage amount or the standard amount, whichever is less. Also give consideration to any separate expenses the liable taxpayer is solely responsible for paying, such as alimony, child care, etc.

(7) If the non-liable person’s income is not provided or cannot be verified internally, allow the liable taxpayer only the national and local standards for 1 person plus any allowable and verifiable dependents. In those cases where the non-liable person refuses to provide the supporting documentation (if the expenses are reasonable) you may consider allowing up to 50 percent of the additional necessary household expenses.

(8) If the non-liable person is a minor who is receiving survivor benefits, a decrease in certain allowable expenses may be appropriate. Prior to reducing any allowable expense, the OE/OS must determine the reduction will not cause a hardship to the household.

(9) If an in-house verification is conducted on the not liable person, this information cannot be relayed to the taxpayer. It is considered an unauthorized disclosure if any information is shared with the taxpayer.

(10) When the taxpayer can provide documentation that income is not mingled (as in the case of roommates who share housing) and responsibility for household expenses are divided equitably between cohabitants (as documented by rental agreements, bank statement analysis, etc.), the total allowable expenses must not exceed the total allowable housing standard for the taxpayer, plus any allowable dependents. In this situation, it would not be necessary to obtain the income information of the other person(s). However, sufficient financial information must be secured to verify the total household expenses and prove that the taxpayer is paying their 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.

(1) The use of Decision Point or IAT Compliance Suite Payment Calculator is recommended to assist in this calculation to determine if the taxpayer can fully pay under installment agreement guidelines or to determine the future income component of RCP. If Decision Point or IAT Compliance Suite Payment Calculator is not available, follow the procedures shown below.

(2) 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. The number of months used depends on the payment terms of the offer.

If...	Then...
The offer will be paid in 5 months or less and 5 or fewer payments	Use the realizable value of assets plus the amount that could be collected in 12 months.
The offer is payable in six to 24 months	Use the realizable value of assets plus the amount that could be collected in 24 months.

(3) 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 by the number of months applicable to the terms of offer.

(4) For lump sum cash and periodic payment offers, when there are less than 12 or 24 months remaining on the statutory period for collection on all tax periods, use the number of months remaining on the statutory period for collection.

(1) A taxpayer who operates a business or has an interest in a business enterprise, LLC, partnership, and/or corporation will be required to provide sufficient information to determine the value of their interest and expected income from the entity. The financial information may be provided on a Form 433-B, Collection Information Statement for Businesses, current balance sheet, income statement, profit and loss statement, or combination thereof. Any information should be verified via appropriate internal and external sources. Refer to IRM 5.8.4.22.3, Offers from Operating Businesses relative to issues which should be reviewed and considered.

(2) Reported income must be verified by the OE/OS. This financial review should include bank statements and may include income tax returns, or other financial documents available to the taxpayer. In circumstances in which entity information is being reviewed in conjunction with an offer submitted by an individual, a determination must be made whether the entity is retaining earnings which should be distributed to the taxpayer which would increase FIV or RCP of the individual submitting the offer.

(3) Expenses should also be verified to determine the correct net income is being reported and distributed to the owners/shareholders. A component which must be evaluated is the reporting of depreciation and the impact it has on the net income of the business. Depreciation and other non-cash expenditures will not be allowed as an expense when calculating FIV. Actual cash expenditures required to be paid in the ongoing operations of the business, including any payments of principal on debt incurred to purchase assets used in the production of income, are allowable.

(4) Refer to the following IRM subsections to assist in reviewing business financial statements, income and expenses. IRM 5.15.1.15, Business Financial Statements, IRM 5.15.1.18, Business Expenses, and IRM 5.15.1.19, Determining Business Income.

(1) Collection from a LLC involves unique issues especially when the liabilities include employment or excise taxes. Refer to IRM 5.1.21, Collecting from Limited Liability Companies (LLC) for a complete discussion on the characteristics of a LLC and issues involving collection of liabilities owed by the LLC.

(2) While investigating an offer in compromise that involves an LLC, knowing the classification for federal tax purposes is necessary. Yet, classification of the LLC for federal tax purposes does not negate state law provisions concerning the legal status of the LLC. For example:

• Classification of an LLC as a partnership does not mean the member/owners have liability for LLC debts as would be the case in a state law partnership.

• Under certain circumstances, an LLC will be disregarded as an entity separate from its owner. This classification does not mean that an LLC owned by an individual is the equivalent of a sole proprietorship.

(1) Since the taxpayer’s interest in any asset must be included in RCP, if the taxpayer has any interest in a partnership, a determination must be made on the appropriate value to include in an acceptable offer amount. The taxpayer’s interest may be as a general or limited partner.

(2) Generally, the value of the taxpayer’s interest would either be the taxpayer’s share of the underlying assets or the value of the transferable interest. The determination of the correct valuation would also be based on other factors, including whether the taxpayer is a general partner, how the taxpayer’s interest was acquired, how the assets of the partnership were acquired, the taxpayer’s relationship to the other partners, and the liquidity of the transferable interest.

(1) Taxpayers that previously extended the CSED in connection with an installment agreement may request approval of an OIC. In accordance with IRM 5.8.4.3 Doubt as to Collectibility, an offer should not be accepted if the liability can be full paid under current installment agreement guidelines.

(2) IRC 6502(a)(2)(A) provides that the CSED may be extended in connection with granting installment agreements. CSED extensions by waiver are only permitted when securing partial payment installment agreements (PPIA) and only for specific situations. See IRM 5.14.2.3, Collection Statute Expiration Date (CSED): Law, Policy, and Procedures for further guidance on the policy of the IRS for extending the CSED by waiver.

(1) Payment terms are negotiable, but should provide for payment of the offered amount in the least time possible. If a taxpayer is planning to sell asset(s) to fund all or a portion of the offer, the payment terms for the offer should provide for immediate payment of the amounts received from the sale. If the taxpayer is planning to borrow a portion of the money, the OE/OS should determine when the loan will be received and the payment terms of the offer should provide for payment of the borrowed portion at the time the funds are received.

(2) For those taxpayers who agree to shorter payment terms, fewer months of future income are required:

(3) While a periodic payment offer is being evaluated by the IRS, the taxpayer must make subsequent proposed periodic payments as they become due. Even though there is no requirement that the payments be made monthly or in equal amounts, base offer payments on the taxpayer’s specific situation and reflective of the taxpayer’s ability to pay. While the calculation of RCP and consideration of any special circumstances will assist in determining an acceptable offer amount, the IRS is not bound by either the offer amount or the terms proposed by the taxpayer. In situations where the OE/OS determines that the proposed offer payment terms are too protracted to recommend acceptance, the OE/OS will discuss with the taxpayer what may be appropriate payment terms based on the taxpayer's circumstances.

(4) A third party source of funds may be required to make the portion of the monthly payment that is greater than we determined the taxpayer can afford from future income. Document the case history with source of the funds, if relevant to the case decision.

(1) For example the taxpayer accrued the following liability:

(2) The offer was determined processable on May 31, 2022. The taxpayer has no equity in assets and can pay $300 per month.

(3) The amount collectible from future income is $300 times 20 months = $6,000.

(1) For example the taxpayer accrued the following liability:

(2) The offer was determined processable on May 31, 2022. The taxpayer has $30,000 equity in assets which they will pay within 90 calendar days and can pay $300 per month which they will begin paying within 30 calendar days.

(3) After applying the $30,000 payment for the equity in assets, the amount collectible from future income is $300 times 24 months = $7,200 Reasonable collection potential is $37,200