Verify as much of the 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 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 submitted with an OIC 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.

In certain situations, information may become outdated due to significant processing delays caused by the Service and through no fault of the taxpayer. In those cases, it may be appropriate to rely on the outdated information if there is no indication the taxpayer's overall situation has significantly changed.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, secure a new CIS.

Do not make a blanket request for information that would include such items as real estate appraisals, or information that is not necessary based on the financial statement or taxpayer’s facts and circumstances. Requests for financial information should be tailored to the taxpayer’s specific situation. Do not require the taxpayer to provide information that is available from internal sources, or information that would have no impact on the case resolution.

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 on the 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.

If a taxpayer does not substantiate claimed expenses for Form 433-A categories of court ordered payments, child/dependent care, life insurance, other secured debt, or other expenses OI will complete the IET assuming that the taxpayer is not making any payments for the particular unsubstantiated expense. However, substantiation of claimed health cases expenses of less than the allowable standard is not required.

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, OI's should request a credit report and use the 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 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.

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, QSV is calculated at 80% of FMV. A higher or lower percentage may be applied in determining QSV when appropriate, depending on the type of asset and 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 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 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 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 5.8.5.4.11(4) below for the treatment of assets held as tenancies by the entirety.

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 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 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 RCP.

Review checking account statements over a reasonable period of time (generally three months).

Determine the taxpayer's interest in bank accounts by ascertaining the manner in which they are held and applying the principles described in IRM 5.17.1.

If analysis of the bank statements 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 or their family, consider adjusting the balance. The case file should clearly document these determinations.

Analyze the statement for any unusual activity, such as deposit in excess of reported income, withdrawals, transfers, or checks for expenses not reflected on the CIS. The OI should question these inconsistencies, as appropriate.

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

If analysis of the bank statement reveals large amounts of recently expended funds, see IRM 5.8.5.5 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 OIC, 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 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 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 portion of the company's value to the taxpayer's 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 (e.g., whole life) is not considered necessary. However, reasonable premiums for term life policies may be allowed as a necessary expense.

When determining the value in a taxpayer's 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 taxpayer's benefits and options under the plan.

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 determining the value of a taxpayer's pension and profit sharing plans consider:

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.

There is a statutory exemption from levy that applies to the taxpayer's 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 RCP. The general rule for determining NRE, as discussed in IRM 5.8.5.4.1 above, 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 should document how the values were determined.

It is not necessary to personally inspect automobiles used for personal transportation. When it appears reasonable, accept the taxpayers stated value. For these vehicles, consult a trade association guide. In most cases, the vehicle will be discounted for the FMV to 80% to arrive at the QSV.

When these assets are used for business purposes, they may be considered income producing assets. See IRM 5.8.5.4.3 above for a full discussion on the treatment of income producing assets.

Equity in real estate is included when calculating the taxpayer's RCP in an acceptable offer amount.

When determining equity in real estate, 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. The following methods may be used to establish FMV:

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 above. If the value of real estate is reduced beyond 80% or if FMV is not reduced to QSV, 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 taxpayer's portion is usually 50% of the property's 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 5.8.5.4.3 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 taxpayer's 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 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:

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

When determining RCP for an individual taxpayer who has an interest in a business entity, flexibility should be used with consideration given to the taxpayer's control over the business.

Allowable expenses consist of necessary and conditional expenses, as defined in IRM 5.15.1, Financial Analysis Handbook, and further discussed below. Once allowable expenses are determined, they are used to calculate the amount that can be collected from the taxpayer's future income. See IRM 5.8.5.6, above, for additional information on future income.

When determining a taxpayer’s housing and utility expense, use an amount sufficient to provide for basic living expenses. Use the amount shown in the expense standard schedules as a guideline except to the extent such use would result in the taxpayer not having adequate means to provide for basic living expenses.

A necessary expense is one that is necessary for the production of income or for the health and welfare of the taxpayer's family. IRM 5.15.1, Financial Analysis Handbook, discusses the national and local expense standards, which serve as guidelines to provide accuracy and consistency in determining a taxpayer's basic living expenses. The standards are available on the IRS web site and are periodically updated.

Taxpayers are allowed the National Standard Expense amount for their family size, without questioning the amount actually spent. If the total amount claimed is more than the total allowed by the National Standards, the taxpayer must provide documentation to substantiate and justify the expenses that exceed the National Standard amounts. Fully document the reason for the exception or allowance of additional expenses.

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

When determining a taxpayer’s housing and utility expense, use an amount sufficient to provide for basic living expenses. Use the amount shown in the expense standard schedules as a guideline unless such use results in the taxpayer not having adequate means to provide for basic living expenses. 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. Deviations from the National Standard Expenses must be verified, reasonable, and documented in the case history.

A deviation from the local standard should not be considered merely because it is inconvenient for the taxpayer to dispose of high value assets. In some situations, taxpayer's may be expected to make life-style choices that will facilitate collection of the delinquent tax.

Absent special circumstances, when determining a taxpayer’s housing and utility expense, use the amount that is claimed or the standard, whichever is less.

Transportation expenses are considered necessary when they are used by taxpayer's and their families to provide for their health and welfare and/or the production of income. Employees investigating OIC's are expected to exercise appropriate judgment in determining whether claimed transportation expenses meet these standards. Expenses that appear 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 or lease of a vehicle.

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. within 5 years, i.e., with an installment agreement. For offer 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 in the calculation of the RCP.

Repayment of loans incurred to fund the offer and secured by the taxpayer's assets are allowed when those assets are of reasonable value and necessary to provide for the health and welfare of the taxpayer's family. The same rule applies whether the equity is paid to IRS before the offer is submitted or will be paid upon acceptance of the offer. See IRM 5.8.5.4.3, 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 will be allowed only for the taxpayer's post-secondary education. If student loans are owed but no payments are being made, do not allow them.

Education expenses will be allowed only for the taxpayer and only if it they are required as a condition of present employment. Expenses for dependents to attend colleges, universities, or private schools will not be 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 taxpayer's 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 is senior to the IRS's lien or is collecting funds through a wage attachment or approved installment agreement. State and federal liens (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 5.17.2.4.5, After-Acquired Property). 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.

Generally, charitable contributions are not allowed in the RCP calculation. However, charitable contributions may be an allowable expense if they are a condition of employment or meet the necessary expense test.

Payments being made to fund or repay loans from voluntary plans will not be allowed. Taxpayer's 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. The OI should request the taxpayer or their representative to estimate the tax ramification of the failure to re-pay the loan, or may request assistance from the Examination function or Customer Service to determine the tax consequences.

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:

Generally, the assets and income of a "not liable" person are excluded from the computation of the taxpayer’s ability to pay.

The offer investigator 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:

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 equally between co-habitants (as documented by rental agreements, bank statement analysis, etc.), the total allowable expenses should not exceed the total allowable housing standard for the taxpayer.

If an in-house verification is conducted on the not liable person, this information cannot be relayed to the taxpayer. This is not an Unauthorized Access (UNAX) violation but would be considered an unauthorized disclosure if any information is shared with the taxpayer.

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 remaining on the statutory period for collection.

For lump sum cash and short term periodic payment 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 CSED in connection with an installment agreement may request approval of a deferred payment OIC.

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, resulted in collection periods longer than 15 years; and a deferred payment OIC is later submitted on the balance due accounts (subject to the extension), then, for the purpose of reviewing the OIC, CSEDs are considered to be the later of the following:

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: