How does the IRS interpret your current financial situation

When it comes to federal tax debt, the IRS has specific guidelines it follows to interpret how much money they can reasonably collect from a taxpayer. Taxpayers and businesses that have old tax debts assigned to the collection division of the IRS will often be required to disclose their income, expenses, assets and other necessary information when attempting to resolve their tax problem. The IRS will then conduct a financial analysis to verify this information is correct, determine if any of the expenses you have are not “allowable”, and calculate a reasonable collection potential. When you don’t respond to IRS requests for information, their internal and external analysis will often lead to a levy of your bank account, wages, or potentially a seizure of a personal valued asset like a car, home, etc. IRS collection employees are trained on how to seek out and verify any and all financial information. Any signed disclosure you make to the IRS is signed under the penalties of perjury so lying or leaving out anything can lead to legal consequences.  A thorough understanding of how the IRS determines your available equity in assets and your disposable income is essential to pursuing the best resolution option available.

 

The amount of information you disclose to the IRS depends on your specific tax situation. It could be the case that your debt is small enough and your ability to pay in full or in monthly payments will not cause you any hardship and no financial information is required at all. This is very important to determine ahead of time as unnecessary disclosure might lead to an IRS lien or levy. These sorts of cases are most often resolved in the form of a Streamlined Installment Agreement, and many taxpayers will qualify for this outcome. If your tax debt is above $50,000 or $100,000 depending on the situation the IRS will request at least partial if not full, financial disclosure. Furthermore, if you qualify for an uncollectible status or an Offer in Compromise, no matter the amount of debt you have, expect a request for a full financial disclosure. A trained and diligent Enrolled Agent can decipher a taxpayer’s financial situation ahead of time and help to determine what is the best resolution pathway that exists without unnecessary financial disclosure.

 

The IRS loves their forms, and financial analysis is not excluded. They use forms 433-A, 433-B, and 433-F to determine what amount of money they can collect from a taxpayer. 433-A is a complete Collection Information Statement when full disclosure is necessary. 433-B is essentially the same full disclosure but it applies to businesses specifically and will include information on business assets, bank accounts, accounts receivable etc. Most people will end up using for 433-F, which requires less disclosure and will often lead to the aforementioned Streamlined Installment Agreement. In most situations, this information will be based on the past six months. If during the course of an investigation, these forms become outdated or there is some significant change to a taxpayer’s life (like loss of a job, or medical issue) the IRS will request updated 433’s. Additionally, for businesses, the IRS will want in-person verification of assets listed on a 433-B so be prepared for a visit from the IRS. A skilled Enrolled Agent will usually fill out a full 433-A or B even though a taxpayer may only need to use a 433-F as full financial analysis might help them discover a better outcome where you can pay little or nothing of your amount due.  

 

This is just the start, next week I will dive into realizable equity in assets and how to maximize allowable expenses to reduce a taxpayer’s disposable income. Understanding your rights as a taxpayer and the IRS rules when conducting a financial analysis can be the difference between a levy of your bank account and ending your tax problem without paying your tax in full!

 

Thanks for reading, I hope it is helpful.

 

Ryan Jacobs, EA

MKA Tax Resolution Specialists