When applying for an offer in compromise, your starting place should be Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals. Before spending money hiring a tax professional to represent you, run the numbers yourself to see if you have a shot at having your offer accepted. After all, the IRS uses a specific formula to determine the amount they will settle for.
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Form 433-A is six pages long, and the first thing you’ll want to do is determine where you stand with the IRS. So skip the first several pages and check out page four. The block at the top of the page (lines 20-45) is where the IRS does much of its dirty work to decide how you will be treated, and whether you will be deemed uncollectible, qualify for an installment agreement (and how much they’ll expect you to pay), or qualify for an offer in compromise.
So sharpen your pencil, and let’s get started.
This section at the top of page four is designed to provide a snapshot of your financial life for one month. So be sure the numbers you enter are reflective of one month’s income and expenses.
In the left hand column enter all of your income. Be sure to include everything including, wages, self-employment income, alimony and child support.
If you are self-employed as a sole proprietor, first fill in the financial statement on page six to determine your monthly disposable income. Copy the numbers from your last tax return (Schedule C) or from your most recent financial statements. Unless you are presenting the form 433-A during first quarter, the IRS prefers that you take the numbers from your most recent financial statement rather than your tax return. Be sure that your totals balance between the financial statement or tax return and form 433-A.
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Once you have listed and totaled your income on page four, tackle the expense categories on the right hand column. Follow the instructions carefully. Note that many of the line items are footnoted, read each footnote to determine the correct treatment for that particular line item.
The IRS has a set of national standards governing food, clothing and miscellaneous (line 33), housing and utilities (line 34), and vehicle operating costs (line 36). Write in the amount you actually pay then look up the national standards on the IRS website to ensure that you have not exceeded them. If you have, reduce your number to the amount that the IRS allows or be prepared to justify your additional expenditures. You must use the lower of your actual expenses or the national standards.
There is no place to fill in your long list of unsecured creditors – like credit card -companies because the IRS doesn’t consider them.
Once you’ve completed this section, subtract your total allowable expenses from your total income. Take the remainder and multiply it by 48. This is roughly what the IRS will consider accepting in settlement of your past due tax liability. If your remainder is a negative number you must still present an offer. You are not allowed to offer zero.
Up Next: I will discuss tweaking the numbers and deciding on whether to make an offer in compromise or simply going for a temporary uncollectible status or installment agreement.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, Calif., and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know." Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.