Financial Analysis continued

As we discussed last week, some taxpayers with federal tax debt will be required to disclose financial information to the IRS. The amount of disclosure is dependent on the type and amount of debt, how much remaining time the IRS has to collect it, and what resolution option the taxpayer is pursuing. Many taxpayers haphazardly give up financial information when talking to IRS personnel on the phone and willingly hand over sources the IRS could levy. IRS employees are well trained in how to coerce taxpayers to give up financial information. Obtaining representation from an Enrolled Agent beforehand will prevent unnecessary disclosure and ensure that a taxpayer’s assets aren’t subject to a surprise levy.

However, whether it’s you, the taxpayer, or a representative, financial disclosure is sometimes required. There are two main financial components the IRS wants to identify: available equity in assets and disposable income. This may not be surprising, but the IRS would prefer a lump sum payment for your entire tax debt. When a taxpayer has equity in a house, stocks, retirement accounts, etc., the IRS will often not so politely suggest that the taxpayer liquidates some of those assets or attempts to get a secured loan using any of those assets as collateral. Available equity in a single asset is calculated as 80% of the fair market value (FMV) of the asset minus any expenses to liquidate, such as realtor fees. The 80% represents the “quick sale value” as the IRS wants to sell the asset as soon as possible to receive the debt due. Sometimes the equity in an asset is “unrealizable” because the taxpayer can’t liquidate the asset. For example, a taxpayer with a current mortgage might attempt to refinance and use those funds to pay the IRS. If the lending institution denies the loan then that equity is not “realizable”. Again, it is important to remember that this disclosure identifies possible levy sources. It is highly unlikely the IRS will seize a retirement account or a personal residence, but all other assets are on the table. As an Enrolled Agent, I will go through each and every asset to determine if there is some manner in which they are exempt as a source of equity.

The IRS also wants to know a delinquent taxpayers “disposable income”. Simply put, this is income minus allowable expenses. The IRS has local and national standards set based on family size for what is deemed to be an allowable expense. Local standards are set by county (consider the cost of renting in San Francisco versus the cost in Wichita, Kansas). National standards include things such as food, clothing, housekeeping supplies, etc. Whether or not a taxpayer is allowed expenses greater than the standards depends on what resolution option they are pursuing. Above standard expenses are often allowed (with substantiation) when a taxpayer is wanting to set up an installment agreement or enter a non-collectible status. However, if you are going to attempt an Offer in Compromise the IRS typically very strict in holding taxpayers to these standards.

When considering a taxpayer’s allowable expenses, it is important to note that facts and circumstances can easily result in a necessary expense greater than that which is allowable. For example, consider if a taxpayer has a medical condition that requires them to eat specific, expensive food. The taxpayer can only buy this food at Whole Foods and on a monthly basis it puts them well above the national standard. The IRS must consider these situations and should allow for a deviation from the standard when it impacts the health and wellness of the family, their production of income or creates some other financial hardship. Thus all expenses are negotiable! But how to go about articulating these circumstances to the IRS can be difficult as collections employees have a one track mind: get money from taxpayers. The IRS will often request that taxpayers take some time to change their lifestyle and better appropriate their money to pay their past due taxes. As an Enrolled Agent, I do the same thing, but on your behalf and not the IRS’. Often times some smart financial planning can lead to a taxpayer qualifying for an Offer in Compromise and save them from paying all of their burdensome tax debt!

 

Hope you enjoyed!

 

Ryan Jacobs, EA

MKA Tax Resolution Specialists