This IRM provides instructions for securing, verifying and analyzing financial information. This analysis provides the basis for determining a taxpayer’s ability to pay delinquent tax liabilities, which enables Collection employees to make appropriate collection decisions to resolve cases.

Audience: Collection employees are the primary users of this IRM.

Policy Owner: Director, Collection Policy, SB/SE is the policy owner of this IRM.

Program Owner: SBSE Collection Policy, Offer in Compromise (OIC) is the program owner of this IRM.

Primary Stakeholders: Collection employees and managers are the primary stakeholders for this IRM.

Program Goals: This guidance contains procedures for effective taxpayer contact for Collection employees. Following these procedures ensures the protection of taxpayer rights, emphasizes employee safety and protection, and leads to timely and effective case resolution.

An interview should be conducted in order to determine the appropriate case resolution. Request full payment of the tax liability. Encourage taxpayers to pay off the tax liability as quickly as possible. If taxpayers are unable to pay in full (and do not qualify for a Guaranteed, Streamlined or In-Business Trust Fund Express Installment Agreement) secure a complete Collection Information Statement (CIS). If a taxpayer needs assistance preparing a financial statement and is not represented, he or she may be eligible for assistance from a Low Income Taxpayer Clinic (LITC).

The taxpayer's financial information may be secured on:

Revenue officers may use Form 433-F, Collection Information Statement:

A business taxpayer's own financial statement (income statement and balance sheet) can be used as a substitute for the income and expense section of the Collection Information Statement.

A CIS submitted by a taxpayer should reflect information no older than the prior six months. If during the investigation of the case, the information becomes older than 12 months, update the information. Updates can usually be pen and ink changes initialed and dated by the taxpayer and/or revenue officer. If during the investigation, the financial information becomes older than 12 months and it appears significant changes have occurred, a request for updated information may be appropriate. Additional supporting documents should be secured when appropriate. If there is reason to believe that the taxpayer's situation may have significantly changed, secure a new CIS.

Revenue officers will attempt to secure, review and discuss financial statements in the field. If you are unable to secure a financial statement on the initial contact, schedule a face-to-face follow-up appointment to complete, review and discuss the financial statement at the taxpayer’s business, residence or representative’s office. If meeting with the taxpayer at their place of business or residence will put the revenue officer at risk, schedule the appointment at the revenue officer’s post of duty and document the case history. If the taxpayer’s representative has a valid power of attorney on file, refer to section (11) below.

While some aspects of the financial statement review process, such as securing financial information, can occur by phone or correspondence, a face-to-face meeting with the taxpayer and/or the taxpayer’s representative, while in the field, is preferred to effectively facilitate the verification/validation of the financial statements provided. The physical verification of the business assets is required at some point early in the financial statement review process and should be conducted in the presence of the taxpayer and/or the taxpayer’s representative.

If the taxpayer refuses to meet face-to-face with the revenue officer to complete, review and discuss the CIS, but agrees to provide financial information, the CIS may be secured by phone or correspondence. In these situations, the revenue officer must make a field call to verify business assets unless a field call will put the revenue officer at risk. The field call to verify assets, should be conducted in the presence of the taxpayer and/or the taxpayer's representative. If the taxpayer’s representative has a valid power of attorney on file, refer to section (9) below.

If the taxpayer is unable to complete a financial statement at the time of the initial contact (e.g. health issue, scheduling conflict, taxpayer is out of town, taxpayer wants to confirm IRS employee’s identity, etc.), but can meet face-to-face with the revenue officer within a reasonable amount of time (e.g., 2-3 weeks) that does not constitute refusal to meet. The face-to-face meeting should be rescheduled for the future date. If a face-to-face meeting is not conducted, the revenue officer must document the reason the financial statement was not secured during a face-to-face meeting in the ICS history.

If the taxpayer refuses to complete the financial statement, follow the guidance in IRM 5.1.10.3(10),Taxpayer Contacts, Initial Contact.

When the taxpayer is represented, the revenue officer will interview the taxpayer’s representative at the representative’s office or via phone, if the representative is not local, to complete, review and discuss the financial statement. Once the financial statement has been secured and business assets are disclosed, schedule a meeting with the taxpayer and the representative to view the business assets. If the representative is not local, ask the representative to travel to the taxpayer’s business to view the assets or to participate via phone, with the taxpayer present, to view the business assets. Visiting the taxpayer’s business, assessing the operation and viewing the assets will contribute to an informed collectibility determination.

If the representative states their efforts to secure the information needed to complete the CIS have been unsuccessful, advise the representative that the appropriate enforcement action and/or administrative actions will be taken and document the ICS history. See guidance in IRM 5.17.6, Legal Reference Guide for Revenue Officer, Summonses.

The Allowable Living Expense (ALE) Standards, also known as the Collection Financial Standards, include national and local standards, which are guidelines established by the IRS to provide consistency in certain expense allowances such as food and household expenses, medical expenses, housing and transportation. Reference to these standards will be found throughout this section. Exhibit 5.15.1-2 provides instructions for on-line access to the actual standards.

The standard amounts set forth in the national and local guidelines are designed to account for basic living expenses. In some cases, based on a taxpayer's individual facts and circumstances, it will be appropriate to deviate from the standard amount when failure to do so will cause the taxpayer economic hardship. See IRM 5.15.1.2(13). The taxpayer must provide reasonable substantiation of all expenses claimed that exceed the standard amount.

Document the case file accordingly. Examples of items which may be requested for substantiation of expenses over the standard or to verify other necessary expenses include, but are not limited to, copies of items such as:

Economic hardship occurs when a taxpayer is unable to pay reasonable basic living expenses. The determination of a reasonable amount for basic living expenses will be made by the Commissioner and will vary according to the unique circumstances of the individual taxpayer. Unique circumstances, however, do not include the maintenance of an affluent or luxurious standard of living. See, (26 CFR 301.6343-1(b)(4)).

The Allowable Living Expense standards are not applicable to corporations, partnerships, Limited Liability Companies (LLC) (where the LLC is identified as the liable taxpayer), or for any business expenses. Allowable business expenses are the costs of carrying on a business or trade. Generally, they must be necessary for operation of the business. Use bank statements, tax returns or other records to verify business income and expenses. Request additional documentation if assets, liabilities, expenses or income appear questionable.

Analysis and verification of a CIS should take place shortly after obtaining the CIS. The ability to pay determination based on a thorough financial analysis will be communicated to the taxpayer within a reasonable amount of time after obtaining the CIS.

Emphasize to the taxpayer how much the IRS expects from them rather than how the IRS expects them to spend their money.

The analysis of a taxpayer's financial condition provides a basis to make one or more of the following decisions:

If during the course of conducting a financial investigation, the taxpayer continues to accrue tax liabilities for additional tax periods (for example, a sole proprietorship that continues to fail to make federal tax deposits), enforced collection action should be considered, when appropriate. See IRM 5.7.8, In-Business Repeater or Pyramiding Taxpayers. For hardship situations, see IRM 5.16.1.2.9, Hardship.

Analyze the income and expenses to determine the amount of disposable income (gross income less all allowable expenses) available to apply to the tax liability.

Analyze assets to resolve the balance due accounts.

In some cases, payments on expense items are not due in regular monthly increments. Average necessary living expense items with varying monthly payments over 12 months.

Exceptions to verifying and allowing certain expenses or excessive expenses when securing an installment agreement may apply. See IRM 5.14.1.4.1, Six-Year Rule and One-Year Rule.

When conducting interviews to secure and/or review financial statements, ask pertinent questions to determine as much as possible about the taxpayer's financial condition and document the results. For example:

Observe and document the physical layout of the business, the number of employees, the type and location of equipment, machinery, vehicles and inventory. A brief tour of the business premises may help to gauge the business operation and the condition of assets.

A thorough verification of the CIS involves reviewing information available from internal sources and requesting that the taxpayer provide additional information or documents that are necessary to determine reasonable collection potential. Consider contacting third parties to verify or obtain information. See IRM 25.27, Third Party Contacts.

Collection issues that have been previously addressed during a balance due investigation by field personnel in the preceding 12 months will not be re-examined unless there is convincing evidence that such reinvestigation is absolutely necessary.

A taxpayer is not required to substantiate expenses that are categorized as National Standards unless they exceed the Standard.

A taxpayer may be required to substantiate expenses that are categorized as Local Standards or Other Expenses. See IRM 5.15.1.10, Local Standards, and IRM 5.15.1.11, Other Expenses.

Substantiation of expense amounts could include the following items: bank statements, credit cards vouchers, rent/lease receipts and leases, payment coupons, court orders, contracts, and canceled checks. Document how obligations are being met and the source of funds. Taxpayers who own real estate should provide documents showing the monthly payment, the purchase price, date of purchase, and the principal amount due. When obtaining documents for substantiation, ask the taxpayer for copies, not original documents. If necessary, secure telephone numbers and contact names of creditors. These can be used if verification is necessary.

When analyzing expenses for a business taxpayer, ensure that business expenses are not included under personal expenses. Compare Form 433-A and Form 433-B to income tax returns to verify assets and income or analyze bank deposits.

Secure third party information such as bank deposit records, government agency records, competitors or suppliers to determine the source of funds of the taxpayer. Ensure that third party notice requirements are met. Refer to IRM 25.27, Third Party Contacts. Use summons authority to secure leads to assets and income. Refer to IRM 25.5.1, Summons.

Compare income to expenses. If expenses exceed income, ask the taxpayer probing questions to determine alternate sources of income that may be supplementing his/her income. Look for and consider:

Generally, when determining ability to pay, a taxpayer is only allowed the expenses he/she is required to pay. There may be cases where a taxpayer lives with a non-liable person (i.e., spouse, domestic partner, boyfriend/girlfriend) and they have shared household expenses. In these cases, it may be necessary to review other income into the household and any expenses shared with the non-liable person in order to determine the taxpayer's allowable portion of the shared household income and expenses.

Although the assets and income of a non-liable person may be reviewed to determine the taxpayer's portion of the shared household income and expenses, they are generally not included when calculating the amount the taxpayer can pay. One notable exception is community property states. Follow the community property laws in these states to determine what assets and income of the otherwise non-liable spouse are subject to collection of the tax. The non-liable spouse can seek assistance from the Taxpayer Advocate Service.

Regardless of whether community property laws apply, secure sufficient information concerning the non-liable person to determine the taxpayer's proportionate share of the total household income and expenses. Review the entire household's information and:

Shared expense calculations between spouses are used when the parties live in a separate property state or state law permits the parties to separate their incomes and the non-liable spouse does not agree to use their income to pay the liable spouse’s tax debt. See IRM 5.15.1.4(2). Calculations of allowable expenses will depend on the circumstances of each taxpayer. The method used to calculate the liable taxpayer's ability to pay must be documented in the case history.

When the taxpayer can provide documentation that income is not commingled (as in the case of roommates who share housing) and responsibility for household expenses is divided equitably between co-habitants, the total allowable expense should not exceed the total allowable housing standard for the taxpayer. In this situation, it would not be necessary to obtain the income or expense information of the non-liable person(s). Verification of expenses the taxpayer pays should be requested if the expenses appear unreasonable. The investigating employees should exercise sound judgment in these situations to determine which approach is more appropriate, based on the facts of each case.

If an internal verification is conducted on the non-liable person, this information cannot be provided to the taxpayer. This is not an Unauthorized Access (UNAX) violation if the revenue officer's duties require the inspection or disclosure of this information for tax administration purposes. However, it is a disclosure violation under IRC 6103 if any information is shared with someone other than the non-liable person in question, unless consent to disclose the information is obtained from the non-liable person.

When required, verify as much of the financial statement as possible through internal sources and online research (see table below).

When internal locator services are not available, or a discrepancy is indicated, request that the taxpayer provide reasonable information necessary to support the financial statement or verify using external sources. See IRM 5.15.1.7, External Sources.

Consider researching the information sources listed below to verify the CIS, in situations where a CIS is required. Tailor your research to the facts and circumstances of each case.

Request appropriate documentation from the chart below to verify the CIS. Do not make a blanket request for information. Tailor your request to each taxpayer's specific situation. Do not require the taxpayer to provide information that is available from internal or online sources.

Allowable expenses include those expenses that meet the necessary expense test. The necessary expense test is defined as expenses that are necessary to provide for a taxpayer's and his or her family's health and welfare and/or production of income. There are three types of allowable expenses:

The Allowable Living Expense (ALE) Standards, also known as Collection Financial Standards, provide for a taxpayer's and his or her family's health and welfare and/or production of income. These expenses must be reasonable in amount for the size of the family and the geographic location, as well as any unique individual circumstances. The total necessary expenses establish the minimum a taxpayer and family needs to live.

The ALE standards are not available for international taxpayers or the U.S. Territories, except for housing and utilities in Puerto Rico. In the absence of standardized figures for foreign countries, a fair and consistent approach should be applied to what is allowed as living expenses for international taxpayers. Collection employees should not use any other non-ALE figures as pre-determined guideline figures or arbitrarily select any location in the United States as a starting point for allowances. In those cases where there are no ALE standards or leverage to enforce collection of a balance due, the taxpayers' submission of living expenses should generally be accepted, provided they appear reasonable.

National Standards: These establish standards for Food, Clothing and Other Items and Out-of-Pocket Health Care Expenses.

Local Standards: These establish standards for two necessary expenses: 1) housing and utilities and 2) transportation. Taxpayers will normally be allowed the local standard or the amount actually paid monthly, whichever is less.

National and local expense standards are guidelines. If it is determined a standard amount is inadequate to provide for a specific taxpayer's basic living expenses, allow a deviation. Require the taxpayer to provide reasonable substantiation and document the case file.

Generally, the total number of persons allowed for national standard expenses should be the same as those allowed as total dependents and taxpayers claimed on the taxpayer's current year income tax return. Verify that the dependents claimed on the taxpayer's income tax return meet the dependency requirements of the IRC. There may be reasonable exceptions. Fully document the reasons for any exceptions. For example, foster children or children for whom adoption is pending.

A deviation from the local standard is not allowed merely because it is inconvenient for the taxpayer to dispose of valued assets or reduce excessive necessary expenses.

Other Necessary Expenses - These expenses meet the necessary expense test and normally are allowed. The amount allowed must be reasonable considering the taxpayer's individual facts and circumstances.

Other Conditional Expenses - These expenses may not meet the necessary expense test, but may be allowable based on the circumstances of an individual case. Other conditional expenses may also be allowable if the taxpayer qualifies for the six-year rule and one-year rule. See IRM 5.14.1.4.1, Six-Year Rule and One-Year Rule.

National Standards: Food, Clothing and Other Items - These include the following expenses:

Allow taxpayers the national standard amount for their family size without questioning the amount actually spent.

A taxpayer who claims more than the total allowed by the national standards must provide documentation to substantiate and justify as necessary those expenses that exceed the total national standard amounts. Deviations from the standard amount are not allowed for miscellaneous expenses.

All deviations from the national standard expenses for food, clothing and other items must be verified, reasonable and documented in the case history.

National Standards: Out of Pocket Health Care Expenses – These include:

The out-of-pocket health care standard amount is allowed in addition to the amount taxpayers pay for health insurance or individual shared responsibility payment if applicable.

Taxpayers and their dependents are allowed the standard amount monthly on a per person basis, without questioning the amounts they actually spend. Taxpayer verification of out-of-pocket expenses is not required unless the amount claimed exceeds the standard.

Taxpayers who claim more than the total allowed by the out-of-pocket health care standard, may be allowed more than the standard if they provide documentation to substantiate and justify the additional expenses. This situation may be encountered in situations involving taxpayers with no health insurance.

All deviations from the national standards for out-of-pocket health care expenses must be verified, reasonable and documented in the case history.

Local standards include the following expenses:

Other expenses may be necessary or conditional. Other necessary expenses meet the necessary expense test and normally are allowed. The amount allowed must be reasonable considering the taxpayer's individual facts and circumstances. Other Conditional Expenses may not meet the necessary expense test, but may be allowable based on the circumstances of an individual case.

There may be circumstances where expenses may be allowed even if they do not meet the necessary expense test. If the IRS tax liability including accruals can be paid within six years and within the CSED, all expenses may be allowed if they are reasonable. If the taxpayer cannot pay within six years, it may be appropriate to allow the taxpayer up to one year in order to modify or eliminate one or more expenses. See IRM 5.15.1.3, Analyzing Financial Information.

If other conditional expenses are determined to be necessary and, therefore allowable, document the reasons for the decision in your history.

Delinquent State and Local Taxes. Payments for delinquent state and local (county or municipal) tax liabilities may be allowed in certain circumstances:

Generally all household income, including income that is exempt from tax on the Form 1040, will be used to determine the taxpayer's ability to pay. Income earned by a taxpayer’s dependent child, claimed on the child’s Income Tax Return, would generally not be included in the taxpayer’s household income. However, if an independent adult child is living with the taxpayer and contributing to the household income used to pay living expenses, that adult child’s income may be included in a Shared Expense analysis. In cases where a liable taxpayer lives with a non-liable person, refer to IRM 5.15.1.5, Shared Expenses, for a complete explanation of determining proportionate income and expense calculations.

Income consists of the following:

The Internal Revenue Code does not include specific provisions for liability collection from most state law business organizations. The provisions of state law that shield certain persons or entities from liability are used as guidance for determining the entity liable for taxes incurred in a business.

State law determines what rights the taxpayer has in the property the government seeks to reach. Therefore, the attachment of a federal lien to property is highly dependent upon state law.

Classification principles must be used to first determine the identity of the liable party. State law definitions of property are then used to determine what property the federal tax lien attaches to.

Generally, an assessment of tax in the name of a business entity can be taken as evidence of liability on the part of the party assessed. However, partners who are not assessed may be liable under state law - e.g., general partners may be liable for partnership liabilities.

Single owners of certain limited liability companies (LLCs), with respect to employment taxes on wages paid prior to January 1, 2009, could file returns in the name of the LLC even though only the owner was liable. This has created problems since assessments where the single owner is liable are indistinguishable from assessments where the LLC is liable.

Business entities fall into five broad categories:

The sole proprietorship (also known as just a proprietorship) is the simplest form of business organization.

Partnerships are organized under state law through partnership agreements.

Corporations are chartered by the states under specific incorporation statutes.

Limited liability companies (LLCs) are business organizations chartered by the states under specific limited liability company statutes.

Limited liability partnerships (LLPs) are formed under a state limited liability partnership law.

The analysis of a business taxpayer’s financial condition provides the basis for the majority of case resolutions. Revenue officers are expected to perform and document a thorough and accurate analysis of the taxpayer’s financial information. This assessment of the overall financial condition of the business should indicate the most appropriate case resolution.

A complete CIS, Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B, Collection Information for Businesses, enables revenue officers to make sound decisions to resolve cases and to take the appropriate enforcement action when warranted.

Many businesses employ accounting firms to maintain records and books or use over the counter software programs. Because of the complexity of business entities, acquiring and reviewing these records are very important in determining the true value of an asset. The statements that may be secured from business entities are described below. While these other financial statements may help clarify or verify Form 433-A and Form 433-B and may provide additional sources of collection, they do not replace Form 433-A and Form 433-B. They may include expenses, such as depreciation, that are not considered an allowable business expense on Form 433-A or Form 433-B. Allowable business expenses are the cost of carrying on a business or trade. Generally, they must be necessary for the operation of the business.

The Income Statement or Profit and Loss Statement is a financial statement that shows revenue, expenses and profit during a given accounting period, usually either a quarter or a year. Along with the balance sheet, the income statement is a tool used to assess the health and prospects of a company. The income statement shows revenue and expenses, including operating expenses, depreciation, income taxes and extraordinary items. Using the income statement, a taxpayer or revenue officer can quickly figure cash flow, profit margins and other important indicators of how the business is doing.

A business' balance sheet is a snapshot of its financial picture on a given day. A balance sheet shows the financial position of a company by indicating the resources that it owns, the debts that it owes and the amount of the owner's equity in the business. One side of the balance sheet totals up assets, moving from most liquid (cash) to least liquid (plant and equipment or goodwill). The other side of the balance sheet lists liabilities in order of immediacy. Remember that assets must equal liabilities plus shareholder's/owner's equity. The balance sheet, along with the income statement, is an important tool for analyzing the financial health of a company. Using the balance sheet, compare current assets and current liabilities to assess equity; and consider hidden value in assets.

When determining ability to pay, the income and expense information provided must reflect a sufficient time frame to accurately determine the monthly average that could be expected for the entire year. Seasonal variations in business income must be considered, as well as extraordinary events that can lead to excessive increases or decreases in income or expenses at a particular time.

Information provided on the CIS, as it pertains to income, assets, and expenses, should match the information provided on other financial statements, tax returns and schedules, and other sources used to verify assets or encumbrances. Discrepancies must be addressed and documented in the case history.

Taxpayers may substitute business financial statements for the income and expense section of the 433-B, Collection Information for Businesses. If the taxpayer does not submit the income and balance sheet, they should be requested, if available, in order to review the viability of the business.

The taxpayer may also be asked to submit a cash flow analysis. These are often completed when taxpayers seek loans or investors and may already be available for the revenue officer's review.

Cash flow projections are used by a business to forecast future income to meet upcoming expenses. They are based on comparing money owed to expected revenues. This information is most useful when dealing with a business that does not have the ability to full pay on first contact or over a short period of time. Use this to determine if the business can remain current with operating expenses and taxes, and also pay the delinquent taxes.

Cash flow is net income minus preferred dividends plus depreciation (as given in the income statement). Generally speaking, cash flow is the best measure of a company's profits. It is usually calculated by adding depreciation and any other non-cash charges to earnings after taxes. Investors look to cash flow for several reasons:

The analysis of the taxpayer's financial condition provides a basis for making one or more of the following decisions:

The following issues should be considered when deciding the best case resolution:

Address full compliance and ensure taxpayer is current with all filing and paying requirements, including federal tax deposits and estimated tax payments.

When analyzing and verifying the financial data, be alert to any indications of fraud. If indications of fraud are identified, refer to IRM 25.1, Fraud Handbook or contact the Fraud Referral Specialist (FRS) before further contact with the taxpayer or representative.

Trust Fund Recovery Penalty (TFRP) - If the delinquency includes trust fund employment taxes, a TFRP investigation must be completed. The finances of any responsible person would be considered in analyzing the potential payment of the account. See IRM 5.7, Trust Fund Compliance.

The IRC permits a taxpayer entity to reduce its income by deducting expenses paid to earn that income. Often these expenses help to identify assets to pay the tax liability.

Deductions may not necessarily be allowed as an expense in determining the ability to pay -- only actual cash expenses are used. If the taxpayer submits their own income and expense statement, the non-cash expenses should be removed from the analysis.

Substantiation and verification is required for cash expenses.

In analyzing and verifying the business income and expenses or deductions, real or potential assets may be identified. The following charts provide an explanation of the income or expense item and other considerations for identifying assets.

Compensation of Officers - This amount represents compensation paid to corporate officers during the taxable year.

Bad Debt - Bad debts are amounts owed to the corporation but uncollectible.

Taxes and Licenses - This represents deductible taxes and license fees paid on assets by the corporation.

Interest - Interest deduction represents any interest paid or payable on corporate debt.

Depreciation - Depreciation is a method to deduct the purchase price or basis of an asset over its useful life.

Depletion - Depletion is similar to depreciation, but applies to assets such as oil, gas, coal or gemstones. Since the asset is removed from the ground, the depletion allowance is computed to account for this removal from the source.

Pension Plans, Profit Sharing Plans and Employee Benefit Programs - Generally, pension plans, profit-sharing plans and employee benefit programs indicate a retirement account for the employees and corporate officers.

Other deductions - Other deductions represent the cumulative total of all deductions that do not have a line entry on the return.

Net Operating Loss (NOL) Deduction - The net operating loss is not an "out-of-pocket" expense but an artificial amount based upon tax law.

Income represents the return in money from a business, labor or capital investment.

Gross Receipts or Sales

Dividends

Interest

Gross Rents

Gross Royalties

Capital Gain Net Income

Net Gain (or Loss)

Other Income

As described in the previous sections, analysis of the income and expenses identifies many of the assets the taxpayer may have. Additionally, each section of the Collection Information Statement (CIS) should be reviewed to ensure that all sections are completed and all assets have been identified.

Secure the location (foreign or domestic) for each asset, any debts owed on the assets, the date the debt was acquired and the date the debt will be satisfied.

Proper valuation of the assets is necessary to determine the total collection potential of the taxpayer.

A field call should be made to locate and personally observe the condition of assets based on the merits and circumstances of the investigation.

When the taxpayer owns assets located outside of the United States, contact an International Collection or Collection Abusive Tax Avoidance Transaction (ATAT) group to determine the availability of any administrative or judicial tools described in IRM 5.21.3, Collection Tools for International Cases, including Foreign Account Tax Compliance Act (FATCA) data research which can be utilized to determine and verify the taxpayer’s ability to pay. When securing input to determine if any collection potential exists in the assets consider:

To determine equity of an asset, revenue officers must determine the value of the asset, encumbrances against the asset and priority of the Notice of Federal Tax Lien.

Businesses and individuals have similar types of assets. For example, cash is the same for a corporation or an individual. However, some assets that are unique to businesses can be more complex or difficult to value.

The fair market value (FMV) of an asset is the price set between a willing and able buyer and the seller in an arms length transaction with full knowledge of the relevant facts. The FMV can be influenced by market conditions, age of the asset, condition of the asset, zoning requirements, technology, demand, fitness for use, and other factors.

The quick sale value (QSV) of an asset is an estimate of the price a seller could get for the asset in a situation where financial pressures motivate the seller to sell in a short period of time, usually 90 days or less. Generally, the QSV is calculated at 80% of the fair market value. A higher or lower percentage may be appropriate depending on the type of asset and current market conditions.

Encumbrances can be verified using internal sources, online research and external sources. See IRM 5.15.1.6, Internal Resources and Online Research, and IRM 5.15.1.7, External Sources. Refer to the Legal Reference Guide for Revenue Officers (IRM 5.17.2, Federal Tax Liens), to determine priority of the Notice of Federal Tax Lien.

When taxpayers own assets jointly with others, allocate equity in the assets equally between the owners, unless the joint owners demonstrate their interest in the property is not equally divided. In this case, allocate the equity based on each owner's contribution to the value of the asset.

Although the IRS may determine not to enforce the lien on jointly held assets, that would not prohibit the IRS from requesting the taxpayer attempt to secure a loan against the asset, at least to the equity that is allocated to the taxpayer.

When determining the reasonable collection potential, an analysis is necessary to determine if certain assets are essential for the production of income. When it is determined that an asset or a portion of an asset is necessary for the production of income, it may be appropriate to adjust the income or expense calculation for that taxpayer to account for the loss of income stream if the asset were either liquidated or used as collateral to secure a loan.

When valuing income-producing assets:

These considerations should be fully documented in the case history. For example:

A critical part of the financial analysis is to determine what degree of control the taxpayer has over assets and income in the possession of others.

When these issues arise, apply the principles in the Legal Reference Guide for Revenue Officers. See IRM 5.17.14, Fraudulent Transfers and Transferee and Other Third Party Liability or request an opinion from local counsel.

Cash assets include currency on hand and bank account balances, including checking, savings, online, mobile and any other accounts. Determine the location (foreign or domestic) of the bank accounts.

Determine the taxpayer's interest in bank accounts by ascertaining the manner in which they are held. Apply the principles described in the Legal Reference Guide for Revenue Officers, See IRM 5.17.3, Levy and Sale.

Verify whether deposits in escrow or trust accounts are actually held for the benefit of others.

Financial securities are considered an asset and their value should be determined.

To determine the value of publicly traded stock, research a daily paper, the internet, other internal sources or inquire with a broker for the current market price.

Life insurance as an investment is not considered a necessary expense. However, reasonable premiums for term life policies may be allowed when the policy is for the life of the taxpayer.

Whole life policies should be reviewed as an asset for borrowing against or liquidating. Taxpayers can also own whole life insurance policies, with cash value, on the lives of other people.

When determining the value in a taxpayer's insurance policy consider:

Funds held in a retirement plan, including a profit-sharing plan, are considered an asset and may be reachable by levy. Revenue officers should follow the guidance in IRM 5.11.6.3, Funds in Pension or Retirement Plans, when determining whether to levy. In sum:

Prior to levy, attempt to advise the taxpayer that retirement plans may be subject to levy. If a discussion is not held with the taxpayer, this does not prohibit a levy on the retirement plan from being issued.

Consider consulting TE/GE for any questions concerning the validity or qualifications of a plan, the availability of assets for collection, and withholding for current year federal income tax liabilities of the taxpayer.

Prior to levy, attempt to advise taxpayers that contributions to voluntary retirement plans are not a necessary expense. In accordance with IRM 5.15.1.1(11), emphasize to taxpayers how much the Service expects from them rather than how the IRS expects them to spend their money. If taxpayers wish to continue making contributions, they must divert the money from allowed expenses, or use the amount allowed for miscellaneous expenses under national standards, but they must be able to make the payments required on an installment agreement. Advise taxpayers that continuing to make voluntary contributions to retirement accounts, while asserting an inability to pay an amount that is owed, may be considered flagrant conduct, and could result in a levy on retirement accounts. However, if a discussion is not held with the taxpayer after attempts to advise the taxpayer that retirement plans may be subject to levy, it does not prohibit a levy on the retirement plan from being issued. Review of the retirement plan document is generally necessary to determine the taxpayer's benefits and options under the plan.

When determining the value of a taxpayer's pension and profit sharing plans consider:

When the taxpayer will liquidate the retirement plan, allow any penalty for early withdrawal and the current year tax consequence. Consider requiring the taxpayer to submit an estimated tax payment as applicable.

The taxpayer's declared value of household goods is usually acceptable unless there are articles of extraordinary value, such as: antiques, artwork, jewelry, or collector's items. Exercise discretion in determining whether the assets warrant personal inspection.

There is a statutory exemption from levy that applies to the taxpayer's furniture and personal effects and an exemption that applies to the value of tools used in a trade or business. These separate exemption amounts are updated on an annual basis. The levy exemption for tools of the trade does not apply to corporate entities, but only to individual business taxpayers.

When determining the value consider the following:

Motor vehicles, aircraft and vessels (boats) are considered assets. Equity in these types of vehicles must be determined and should be considered as possible collateral for loans.

Generally, it is not necessary to personally inspect automobiles used for personal transportation since their value is easily determined by consulting trade association guides. If the values are in dispute, the taxpayer should be instructed to secure an appraisal from a knowledgeable and impartial dealer or the revenue officer may adjust the value based on the condition of the vehicle. Adjustments to value based on condition should be documented in the case file.

Assets such as airplanes and boats may require an appraisal to determine FMV unless the items can be located in a trade association guide. An explanation of how these values were determined should be documented in the case file.

When these assets are used for business purposes they may be considered income producing assets. See IRM 5.15.1.23, Income Producing Assets, for a full discussion of the treatment of income producing assets.

When determining equity in real estate, FMV of the property must be established. FMV is defined as the price a willing buyer will pay for the property in an arm’s length transaction with full knowledge of the relevant facts based on the property's current condition and use. The following methods may be used to establish FMV:

In determining the interest of the liable party, and the value of the interest, refer to the Legal Reference Guide for Revenue Officers (IRM 5.17.1.2, Local Law Section) and state law for additional guidance. The basis for the valuation should be documented in the case history.

In certain situations, the equity in real estate should be pursued as a means to full pay or reduce the tax liability. In these situations, the taxpayer should be asked to secure a loan, or sell the real estate. If enforcement actions are being considered, refer to IRM 5.10., Seizure and Sale.

In certain cases, a reverse mortgage may enable a taxpayer to pay the tax liability. A reverse mortgage is a loan where the lender pays the homeowner (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while the homeowner continues to live in his/her home. With a reverse mortgage, the homeowner retains title to the home. Depending on the plan, the reverse mortgage becomes due with interest when the homeowner moves, sells the home, reaches the end of a pre-selected loan period, or dies. Because reverse mortgages are considered loan advances and not income, the amount the homeowner receives is not taxable. See IRM 5.12.10.6.2.2, Subordination to Reverse Mortgages, if a NFTL has been filed.

Mortgage and real estate loans represent money loaned to pay for real property. This may disclose real property or real estate notes previously unreported.

Determine the status of the loan and who holds the note or mortgage. Determine if the real estate note can be used as collateral for a loan to satisfy the tax liability or be factored or sold to the debtor.

Trade notes and receivables are income or "account receivable" amounts owed to the taxpayer by others. Consider the value of accounts for purposes of potential enforcement.

To determine the value of accounts receivable:

Careful consideration should be given prior to serving a Notice of Levy on an account receivable when it is determined that liquidation of the receivable would be detrimental to the continued operation of an otherwise profitable business.

Secure a complete listing of accounts receivable:

Consider federal contracts for potential enforcement. Identify the federal payment source and determine if there is a specific payment schedule. Secure a copy of the contract/agreement if needed.

Inventory is property held for sale by the business entity.

The most common inventories are:

Determine the value of the inventory. This may be used as collateral for a loan or may be seized and sold in the event enforcement action becomes necessary.

To determine the value of business assets:

Tax-exempt securities are investments which pay interest which is not taxable.

However, these securities are assets. Since they are not taxable, they are not always listed on the return. The earnings from these securities should be listed on line 8b of the Form 1040.

These securities can include:

These assets represent an account receivable due to the corporation by its shareholders. Sometimes the corporation grants a loan to a shareholder or relative of the shareholder with no intention of repayment.

Determine the following to verify the existence of the loan:

Intangible assets are those without physical form or substance. The most common are:

The existence of an intangible asset can indicate a potential future benefit. While not "physical" , these are valuable assets and thus subject to amortization.

Amortization, like depreciation, is the write-off of an investment expense over a specified period or the economic useful life of the intangible asset. The amount on the return is the unamortized residual balance of the intangible. In other words, it is the amount that has not been written off.

The value of the intangibles can be obtained through the sale of the asset. Examples include:

Consider Medicaid/Medicare payments paid to providers for potential enforcement.

Information regarding Medicaid payments:

For information regarding Medicare payments, see IRM 5.11.6.7.2, Medicare Payments Paid to Providers.