In the last issue, I discussed qualifications for offers in compromise . Please note the following correction: I stated that when one is deemed uncollectible by the IRS, he will be "left alone for an entire year..no liens." Wrong! A lien will likely be filed to protect the government's interest. Taxpayers are, however, protected from garnishments, levies, and other collection activity throughout the uncollectible status time period or while an offer is considered.
And now for part two of the series covering offers in compromise.
Whether you are applying for an installment agreement, uncollectible status or an offer in compromise, your starting place is Form 433-A, "Collection Information Statement for Wage Earners and Self-Employed Individuals." You can download this form at www.irs.gov .
The form is six pages long, and you'll want to start at page No. 4 to determine where you stand with the IRS. 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: whether you will be deemed uncollectible, whether you qualify for an installment agreement (and how much they'll expect you to pay), or if you qualify for an offer in compromise.
So sharpen your pencil; let's get started. If math is not your strong suit, sit down with your tax professional or someone else who's good at crunching numbers.
The section at the top of page No. 4 is designed to provide snapshot of your financial life for one month. So be sure the numbers you enter are reflective of one month's income and expenses.
If your legal entity is a partnership or LLC, enter your guaranteed payments, if any, plus your average monthly share of the profit from your Schedule K-1 onto line 25 income box on page No. 4. If your legal entity is a C corporation, you need only list the income you receive, which is likely W2 wages and possibly rental income, dividends, etc., into the appropriate boxes. You will also be required to complete form 433-B, but for right now, you need not worry about it.
If you are self-employed as a sole proprietor, complete the financial statement on page No. 6 first to determine your monthly disposable income. Copy the numbers from your last tax return (Schedule C) or your most recent financial statements. Unless you are presenting the form 433-A during the first quarter, the IRS prefers that you take the numbers from your most recent financial statement rather than your tax return. Be sure your totals balance between the financial statement or tax return and form 433-A.
Transfer your net business income (line 82) figure to line 23 on page No. 4. Now complete the remainder of the requested information on page 4. 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, and then look up the national standards on the IRS website to ensure you have not exceeded them. If you have, reduce your number to the amount the IRS allows or be prepared to justify your additional expenditures.
Note that there is no place to fill in your long list of unsecured creditors such as credit card companies. That's because the IRS doesn't consider them. They can just stand in line--behind us--is the IRS' take on it.
Once you've completed this section, subtract your total allowable expenses from your total income. What remains is the amount the IRS expects you to pay them each month. If your remainder is a small or a negative number, you may be in a position to be deemed uncollectible or make an acceptable offer to unload the liability.
In the next issue, we will discuss tweaking the numbers and deciding whether to make an offer in compromise or simply going for a temporary uncollectible status or installment agreement.
Bonnie Lee is the founder of Taxpertise located in Sonoma, CA, a firm providing bookkeeping, payroll services, QuickBooks Training, income tax preparation, and tax problem resolution including audits, offers in compromise and other representation issues. She is also the author of Taxpertise: The Complete Book of Dirty Little Secrets and Tax Deductions for Small Business the IRS Doesn’t Want You to Know (Entrepreneur Press, 2009).