When an individual taxpayer files an Offer in Compromise with the Internal Revenue Service (IRS) they are required to complete a Collection Information Statement for Wage Earners and Self-Employed Individuals, Form 433-A. Section 9 of this form is the “Monthly Income and Expense Analysis.” Taxpayers are required to complete this section in order for the IRS to determine their reasonable collection potential (RCP). Taxpayers are expected to state their income and their “claimed” expenses.
In order for the IRS to determine whether the expense figures that the taxpayer is claiming are reasonable the IRS uses “Collection Financial Standards” as a guideline. The IRS has “national” standards for food, clothing and miscellaneous household expenses that are uniform for American taxpayers nationwide. Taxpayers generally don’t have to provide verification of this expense and the IRS without question allows the guideline expense figure.
The IRS also has “local” standards that vary from region to region that the IRS uses as the maximum allowance for expenses such as housing and transportation. The taxpayer is allowed the lesser of the claimed amount that they actually spend or the IRS local standards.
The local housing figures used by the IRS are derived from Census and BLS data, and are listed by state down to the county level. Internal Revenue Code, § 7122© states “the guidelines shall provide that officers and employees of the Internal Revenue Service shall determine, on the basis of the facts and circumstances of each taxpayer, whether the use of the schedules published under subparagraph (A) is appropriate and shall not use the schedules to the extent such use would result in the taxpayer not having adequate means to provide for basic living expenses.” Regrettably, many IRS employees when evaluating an Offer in Compromise, do not look at the “facts and circumstances” and refuse to deviate from the published standards. In fact, the majority of IRS employees do not use them as “guidelines” but use them as “limits” or “caps” on expenses disregarding the taxpayer’s personal circumstances.
The Internal Revenue Service has two expense figures for transportation. One consists of uniform nationwide figures for monthly vehicle payments or lease payments referred to as “ownership” costs. The other expense figure the IRS uses is for the monthly “operating” costs for gas, insurance and maintenance that is broken down by Census Region and Metropolitan Statistical Area (MSA). Also, the IRS has a guideline figure for “public transportation” for those taxpayers that do not own a vehicle and rely on public transportation.
Taxpayers representing themselves, and many inexperienced practitioners, commonly overlook the use of the IRS standards when preparing an Offer in Compromise. In many cases, the IRS identifies that the expenses claimed by the taxpayer far exceed the guideline amounts. In many of these cases, the claimed expenses are reduced to the guideline amounts and result in a positive net difference for the taxpayer. In turn, the IRS often rejects what was believed to be a “good” offer or the offer amount is significantly increased. Therefore, prior to filing an Offer in Compromise it is important to properly evaluate a taxpayer’s income and expenses, taking into consideration the IRS guidelines.