An Offer in Compromise filed with the IRS requires a taxpayer to complete a Collection Information Statement for Wages and people that are Self-Employed, Form 433-A. On this form in section 9 is the Monthly Income and Expense Analysis. This section must be filled out for the IRS to determine their RCP (reasonable collection potential). A taxpayer must put in their income and their expenses that they are claiming.
The IRS uses Collection Financial Standards as a guideline to determine whether or not the expense figures claimed by the taxpayer are reasonable. For example, the IRS has standards for miscellaneous, food, household expenses and clothing that are nationwide for American taxpayers. Because the IRS uses this nationwide standard, taxpayers do not have to verify these expenses, therefore allowing them to go through without question.
Local standards are also used by the IRS for transportation and housing using the maximum allowances, allowing the taxpayer the lesser of the claimed amount that they actually spend.
Internal Revenue Code, § 7122© states “the guidelines shall provide that officers and employees of the Internal Revenue Service shall determine, on the basis of the facts and circumstances of each taxpayer, whether the use of the schedules published under sub paragraph (A) is appropriate and shall not use the schedules to the extent such use would result in the taxpayer not having adequate means to provide for basic living expenses.” Unfortunately, IRS employees don’t consider the circumstances nor do they deviate from the set standards. Instead of using them as guidelines, many IRS employees use them as limits, not giving much consideration to the individual taxpayer’s circumstances.
There are two expense figures for transportation used by the IRS. One expense is a nationwide figure for monthly vehicle payments including a lease payment which is referred to as ownership costs. The other is used for operating costs for maintenance, insurance and gas. For those taxpayers that do not own or use a vehicle, but instead revert to public transportation, the IRS uses a guideline figure based on public transportation.
It is important to properly evaluate your expenses and income before filing an Offer in Compromise and take into consideration the guidelines provided by the IRS, especially when taxpayers represent themselves or use someone with little experience. The IRS can deem that the taxpayer’s claimed expenses far exceed the guideline amounts and then are reduced to the guideline amounts, resulting in a positive net difference for the taxpayer. however, the IRS will most likely turn down what the taxpayer thought was a good offer or increase the amount significantly.