Offer In Compromise: Preparing IRS Form 433-A
Submit IRS Form 433-A when you can't pay the IRS
Sometimes big tax bills—or life in general—can take you by surprise. If you're out of work or have otherwise suffered some type of financial setback so you can't pay the Internal Revenue Service what you owe, provisions are in place to help you out. You can ask for an offer in compromise.
What Is an Offer in Compromise?
The IRS might settle your tax debt for less than what you owe if you meet certain requirements. Qualifying isn't necessarily a one-size-fits-all list of criteria. The decision comes down to your unique circumstances: your income, your expenses, how much equity you have in various assets, and how much of the debt the IRS thinks you're reasonably able to pay.
You must submit Form 433-A, "Collection Information Statement for Wage Earners and Self-Employed Individuals," to document your financial situation when you ask for an offer in compromise. The IRS uses this form to determine your "reasonable collection potential" on your tax debts.
Form 433-A is eight-page form. Here's a breakdown of the information you must report in each of its sections.
Section 1: Personal Information
This section is pretty self-explanatory. You'll identify yourself and give some information about your household. Are you married? Do you own your own home or do you rent? Who else lives with you? Give your address, date of birth, Social Security number, and contact information.
Section 2: Employment Information
Section 3: Personal Asset Information
This is where you summarize what you own and it's a bit complicated. It takes up several pages.
For bank accounts, provide the name and address of your bank branch along with account numbers and current balances. Include information on all checking, savings, and money market accounts you hold at banks, credit unions, and savings and loan institutions. Provide information about cash you have on hand that is not in a bank account.
Provide information about stocks, bonds, mutual funds, and any other investment assets you might own. Include time deposits, certificates of deposit, IRAs, Keogh, 401k, and annuities.
Give details regarding what credit is available to you. Report the name, address, credit limit, and current balance on all your credit cards, department store charge cards, and unsecured lines-of-credit. Do not report car loans and mortgages.
Provide information about the cash value of your whole life or universal life insurance policies. Term life insurance policies don't accumulate cash value so you don't have to report these.
List the make, model, and model year information for each vehicle you own, along with mileage, loan balance, lender, purchase date, and the amount of your monthly payment. Vehicles include all types of cars, trucks, vans, RVs, trailers, motorcycles, and boats whether you've purchased them or you lease them.
It's usually a good idea to print out a report showing the fair market value of your vehicles as well. Make sure you explain what condition your car is in and its approximate market value. The Kelley Blue Book is a good source. Print out private-party values for the two closest vehicle conditions for guidance.
List all your personal assets, including furniture, artwork, and jewelry.
Provide information about your house and other real estate you own in the real estate section, including information about all mortgages and home equity lines of credit. Consider including either an appraisal of the actual properties or a report from a real estate agent showing sales of comparable homes. The IRS sometimes requests a full appraisal.
It's also a good idea to detail the condition of the properties as well. If you recently tried to refinance your mortgage or obtain a home equity line of credit, having any rejection letters from lenders, this will show that lenders are unwilling to extend you additional credit at the present time.
Section 4: Self-Employed Information
Sections 4, 5, and 6 apply only if you own your own business. You don't have to be incorporated or have entered into any other business structure like a partnership. You must complete these sections even if you're a sole proprietor.
Section 5: Business Asset Information
List any assets that are held in the name of your business, such as computers, tools, equipment or even real estate.
Section 6: Business Income and Expense Information
Detail your business's gross revenue and receipts and itemize your business expenses.
Monthly Household Income and Expense Information
Keep Social Security stubs, pension or annuity statements, copies of child support or alimony checks, or a statement of rental income and expenses for three months in advance in preparation for completing this section.
It's usually a good idea to prepare three budgets, each using different criteria.
Budget No. 1: Actual Income and Expenses
This represents your total income and total expenses per month. Tracking your expenses using Quicken, Quickbooks, or using a spreadsheet will come in handy. Take the average of the last three months of income and expenses and report them in the appropriate categories.
The crucial piece of information you're looking for is the difference between your total income and your total living expenses. If you have a positive number, you have disposable income for the month. You can use that disposable income figure to determine whether you can qualify for a monthly installment agreement instead of an offer in compromise.
Budget No. 2: Income and Expenses Using Some IRS Limits
This budget eliminates some of your expenses. The IRS will generally disallow any expense that's not directly related to the health, welfare, and sustenance of you and your family so detail any unusual but necessary expenses. A good example of this would be annual fees paid to renew an occupational license.
Unless an expense is directly related to your job, career, or sustenance, it's unlikely that the IRS will allow the expense. Things like cable television, private school, and credit card payments will not be considered in your allowable budget.
The items actually included in the monthly budget are listed in the Form 433-A footnotes and instructions for guidance. They include food, clothing, housekeeping supplies, personal care products, rent, mortgage payment, property taxes, renter's insurance, homeowner's insurance, HOA dues, electric and gas utilities, telephone utilities, water, fuel oil, and trash collection.
Car loan payments, lease payments, auto insurance, registration and license fees, maintenance, repair, gasoline, parking, tolls, or bus fare are also allowable. Other secured debt, such as loans secured by a 401k or certificate of deposit, are allowed as well.
Life insurance premiums, health insurance premiums, co-payments for doctors and medicines, hospitalization, and other medical and health care expenses can be included.
Taxes for federal income tax withholding, Social Security and Medicare payroll taxes, estimated tax payments, state income tax withholding, local income tax withholding are all allowable expenses.
Child support, alimony, and other court-ordered payments are allowable.
Budget No. 3: Income and Expenses Using IRS Collection Financial Standards
The IRS has developed a set of national and local expense standards for food and clothing, housing and utilities, and transportation. Collectively, these expense guidelines are called the Collection Financial Standards.
Allowable monthly expenses for food, housing, and transportation are limited to the lower of your actual expense or the appropriate Collection Financial Standard. You'll need your actual expenses as collected in Budget No. 1 to compare.
Food and clothing expenses are limited by national standards for allowable living expenses. Residents of Alaska and Hawaii have higher allowable food and clothing expenses. The national standard is broken down by the number of people in a family and monthly gross income.
Housing expenses are limited by local standards for housing expenses. The standard is broken down by the number of people in a family and the county where the family resides.
Transportation expenses are limited by regional standards for transportation expenses. The standard is broken down by the number of cars in a family, and the region where the family resides.
Section 8: Calculate Your Minimum Offer Amount
It will probably look like you have extra money under the IRS budget than you do under your actual budget. Budget No. 3 generally becomes the foundation for calculating your reasonable collection potential on the worksheet to Form 433A that appears in Section 8.
Section 9: Other Information
This is where you'll enter all information that hasn't already been asked of you. The IRS will want to know if you're a beneficiary in someone's will, trust, or insurance policy. Have you filed for bankruptcy in the last 10 years? If so, what was the outcome of that? Are you involved in any lawsuits? Have you sold or transferred any assets for which you did not receive compensation equal to their full value? Do you own any real estate outside the U.S.?
Some Final Tips
Both car loans and mortgages relate to your offer in compromise in several important ways. First, the IRS generally does not want you to have to sell your car or home in order to pay off your tax debt. It prefers that you keep your home and car and find other ways to pay your taxes, such as taking out a home equity line of credit.
The IRS will therefore look at the fair market value of your house and compare it to your outstanding mortgage balance to determine if there's equity there that you can tap into. It will also discount the value of your house, cars, and other vehicles to their "quick sale" value.
This value is equal to 80 percent of the property's current fair market value. Some taxpayers will find that they're "upside down" on their loans using this formula. The loan balance exceeds the quick sale value of their car, truck or real estate.
The IRS might ask a taxpayer to sell a second or third car or to sell a house with substantial equity before an offer in compromise will be approved. These matters are generally open for negotiation between the IRS and a taxpayer. Just be aware that the IRS is looking to collect as much money as possible given your unique financial situation.
Offers in compromise and the accompanying paperwork are complicated dealings. You might do best to at least consult with a tax professional to have your forms reviewed prior to submission to the IRS.
Tax laws change periodically and the above information might not reflect the most recent changes. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.
Required Attachments to Form 433A
You must attach to Form 433A any of the following documentation that applies to your situation:
- Copy of your last tax return (Form 1040, 1040A, or 1040EZ with all schedules)
- Proof of income for the last three months
- Bank statements for the last three months
- Current brokerage and/or annuity statements
- Credit card statements for the last three months
- Statements from insurance companies showing the cash value, loan value, and/or surrender value of your policy
- Current statements from mortgage lenders
- Proof of your business's income and expenses for the last three months if you're self-employed
- Proof of all current expenses for the last three months
- Proof of all transportation expenses for the last three months
- Proof of all health care expenses for the last three months
- Proof of any court-ordered payments for the last three months