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Certain key items to make sure of:
- Each numbered section must have a response. If the answer is zero, put zero. If the question is not applicable to your situation, then put N/A for not applicable. Just make sure all items are answered. If you don’t know the answer, then find it! If you can’t find it then estimate the answer to the best of your ability. Do not round off all your answers. The IRS doesn’t want you to guess or even estimate your income and expenses. They expect you to gather source documents to arrive at the numbers you use. You can use this to your advantage, by putting together a group of months that support the lowest monthly payment you want to make.
- You must try to get a monthly payment low enough so that you can pay it on time each month. You always have the option of paying more money so the balance can be paid off sooner (saving interest and penalties). But be aware that no matter how much you prepay the liability, you absolutely must pay the total amount of your monthly payment on time, or you will default the installment agreement. Under recent rules, the IRS will give you a short time (perhaps a week) to pay and “catch up” the agreement. But don’t rely on it. Even though administratively they are not taking action, technically if you file or pay late (details under another section), you broke the agreement. Once that happens, they can take collection action anytime they want to. For over 20 years, and still holding true today, I have never seen or heard of the IRS taking collection action (levying or seizing) when all five parts of an agreement are still in force. They are as follows:
- An IRS manager must approve an agreement.
- The agreement is given a status code, such as the number 60 or 63.
- The taxpayer files all their business and personal returns on time, including any valid extensions.
- All taxes the taxpayer is involved with are paid on time. The payments must be coded in the IRS’s computer by the correct due dates. It doesn’t matter if an exemption to the penalties are met. Payments must meet the quarterly estimate rules if there is not enough withholding from paychecks.
- Monthly installment payments must be coded in the IRS’s computer by the due date, and for full amount. “Not a day late or a dollar short”.
- Purpose of this form – The IRS uses form 433A to see what income is available to make monthly payments. They also use it to see what assets you have, and how they can access your assets if they need/want to levy or seize them. You will use this form to show them the IRS you don’t have much to give them and why they should accept a low dollar payment plan or offer in compromise.
Instructions, The Joe Mastriano, CPA Way.
Each item is numbered from 1 to 45. Each numbered item must have a response. Use N/A (for not applicable), Zero, or None, as appropriate.
Read each numbered item carefully. You will be painting a picture of your ability to pay your tax liability.
- 1. Put in your name, etc. Try not to use a P.O. Box, unless that conforms with the IRS’s records, such as the record of account.
- 2. Marital status – use married and separated if separated (living in different households), and still married.
- 3. Social Security number- Use the one the IRS has! and date of birth.
- 4. Same for spouse
- 5. Own home, rent, etc. – remember to always think of your purpose when answering questions. Paint a picture that supports your purpose, and make sure it makes sense. If living together, the IRS will consider both incomes and apply the joint living expenses to arrive at a monthly payment. If living apart and not sharing income and expenses, they may only allow the expenses for one person. If living apart and still sharing income and expenses, you will have to argue the additional living expenses created by the two households.
- 6. Dependents are people you are obligated to support. Use the income tax guide definitions for blood relatives. If they are not living with you, they won’t be allowed when using the table allowances, except for legally obligated additional expenses you incur. The most common situation of a dependent not living with you would be your minor child living with your ex spouse, who you meet the dependency test for. No problem, your child support and other court ordered payments will be deductible. Here is where your good will for paying child support outside of a court order hurts you when dealing with the collection division. You could go back to court and raise your court ordered payments. This is a good idea. As long as it’s a court order for child support and related child welfare, and you can prove that you are making the payments, I’ve never had the IRS deny the expense when doing a payment plan or offer.
- 7. If you operate a business, put the information here. Then fill out Form 433B so you can deduct your related expenses against the income.
- 8-9. If you or your spouse receive 1099′s (for contract income, not interest and/or dividends) put it on a 433B. If you don’t claim any expenses against the income, then you can leave it here. Income from W2-s go here. Remember to include the requested attachments, unless you elect to show proof in a different way, such as over more months then the three requested.
- 10. List the other sources of income. If any income is temporary (a few months or so), make sure you include it on page 6 with an explanation of how you won’t have that income available to you anymore.
- 11. List your checking account and balance. If the balance is high because of outstanding checks, then put a lower amount down. Submit bank reconciliations to the IRS showing that the balance is always lower after the checks are cashed. You can argue and win the lower amount.
- 12. List your other accounts. Same rules as #11 apply.
- 13. List your investments. If tied up as collateral, the IRS can’t expect you to cash it in and pay them.
- 14. Cash on hand – I hope you don’t have much. Notice the shaded totals for section 5. They will be added up later as available assets for the IRS. The internal revenue manual, in the collections section, tells the revenue officer to clean out all available assets before considering an installment agreement. Don’t say I didn’t warn you. All of your assets, cash or otherwise, gets added together and increases the amount you have to pay in offer.
- 15. Available credit – Don’t worry, it’s credit, not your money. The IRS will look for untapped sources for you to use and pay to them faster.
- 16. If you have a cash value in your life insurance policy, they will likely ask you to withdraw it.
- 17. Other information – This helps the IRS know about the availability of assets for their taking and other things that will/may affect your ability to pay the liability, and make timely payments.
- 18. List all the vehicles titled in you and your spouse’s names. Guess at any balances that you can’t supply in a timely manner. Remember, if you are really pressed for time, it’s better to leave out some information then to fight with an IRS employee to get more time. You may want to save that first extension of time request for when you really can’t meet a deadline. Getting more than one extension of time is an art for experienced representatives, and taxpayers with a good gift of eliciting empathy.
- 19. If you lease (or lease to own) put the vehicles here.
- 20. List real estate in your name. Fill in all items, and attach an explanation for any fractional or joint ownership. If not in your name, don’t list it! But remember, if you have an equity interest in a corporation, partnership, family trust, etc. you must list it on this form. You will be signing the bottom of the last page “under penalties of perjury” so on the day you sign it, the information must be true, correct, and complete to the best of your knowledge. If you have a >50% interest in an asset or business put it on 433A or 433B as appropriate, with a value for your interest. Be prepared to defend it. Some people with small value assets or small value interests leave it off altogether. If the value is minimal, then you don’t have to worry about fraud, but you do get to avoid the argument concerning valuation. Be careful about interests that are traceable, such as information on a K-1 from Form 1065 or 1120S that the IRS has access to. Be extra careful in an offer. If the offer division feels that you are hiding assets they can turn down your offer based on that. In fact they can and do find excuses quite readily for turning down offers.
- 21. I always use quick sale value for current value.
- 22. This should be on 433B. If you are paid on a 1099 with no deductions for related expenses (it’s rare not to have expenses), and decided not to use form 433B, but actually have some business assets, list them here. Does it matter where you list it? In general, no. However, in an offer situation you are allowed to deduct an amount a little >$3,000 from your business assets.
- 23. A/R- I always leave blank. You could put down people who owe you money personally if you want the IRS to attempt to collect it. Business A/R goes on the 433B.
- 24-25. Wages are from W-2′s only
- 26. Interest & Dividends – From your cash accounts. Of course if you liquidated them, or will do shortly, the interest and dividends won’t exist anymore, so leave it blank.
- 27. Carry over from 433B (or 1099 total if 433B not used).
- 28. If you actually happened to get income from a rental, (pull out depreciation, it’s not a cash outlay), put it here, or explain why you won’t have any income anymore, so they can’t add it to your other income.
- 29-30. Pensions and social security goes here.
- 31. Child support you receive. Yes it’s income. For collection purposes anyway. Don’t worry, you will get deductions to offset this.
- 32. Alimony goes here.
- 33-34. Other income – list other income. So now don’t you feel rich after adding up your many sources of income?
- And now, for your best creative effort to offset that large amount of income, by showing the IRS that most of your income is absolutely necessary for your living expenses. The first three have table amounts. It’s almost impossible to get the IRS to go beyond these amounts. Download the tables from my website or the IRS’s website.
- 35. Food, etc. – They will accept at least the table amount, even if you spend less. If you have a physician’s letter requiring you to eat certain foods that increase your food bill you can add that to your health expense. Make sure you include the letter with your receipts. Read the items in the center of the page that explain what to include on the lines that have the post scripts numbered 1-7. 1-3 pertain to income and 4-7 pertain to expenses.
- 36. Housing and Utilities – Table amount again, but they have a 1 yr rule, so if your amount is greater than the table amount, you can use your amount for the first year, and then their smaller table amount after that. They claim it’s not automatically given at your request. I’ve never failed to get it when it was needed, so plead your case with vigor.
- 37. Use the table for each vehicle. There are two parts, one for payment and one for the operating expenses. These amounts are capped, so read the instructions carefully.
- 38. Medical expenses from your paycheck, separate payments, and any other methods you actually paid for physicians, dentists, insurance, travel to physicians, prescriptions, etc. – all medical related expenses. Be prepared to have receipts and explain why the past expenses represent the future! I had a client with surgery bills who was denied because they said it was not a recurring expense!
- 39. This is your income, FICA, and Medicare, from your paychecks, and estimated payments. Many people, including the IRS, in my experience, just take this from the last filed income tax return, and divide by 12 to get the monthly amount. If that gives you a larger deduction, fine, don’t argue with them. If not, then do an estimated tax calculation based on the year to date income and expenses. You may need your accountant to help you.
- 40. Child support and other court ordered payments go here and are readily accepted by the IRS.
- 41. Child care is allowed only if both spouses work. Special needs dependent care and expenses tend to be o.k. even if one spouse doesn’t have income.
- 42. Life insurance – The only time it seems they accept this is if you are an insurance salesman! Good luck with this, I’m sure there are willing IRS employees that will allow this.
- 43. Other secured debt – yes under acceptable circumstances. What they are I really don’t know. Maybe your furniture payments listed in #21.
- 44.-45. Other expenses – If you have certain expenses that are necessary for living, and are not part of any item above, then list them here and be prepared to argue aggressively.
Now, #34 less #35 shows how much you can pay each month toward your liability. Let’s look at this from another perspective.
Let’s say you have a liability of approximately $50,000 under your social security number for personal and/or trust fund taxes. Consider the following cases.
- a) You hardly have any assets, maybe $5,000 worth. and your 433a shows that you can’t make monthly payments. You are probably an offer in compromise candidate. If you fill out the offer form prior to the deadline given to you by the IRS collection person, and meet the other requirements, then submit the offer to the IRS in place of doing a payments plan. If you can’t submit it by the deadline, give them the 433A and/or 433B information with backup and request time to do an offer. You should be able to get it.
- b) You hardly have any assets, maybe $5,000 worth, and you can pay $300-$400 per month. Given that the $50,000 is accruing interest and penalties, you will not be able to pay this off in 10 years. Ten years is the (stature of collections) time that the IRS has to collect the money starting from the date it is assessed. Not that they will give you that amount of time anyway. They want the liability paid off as soon as the financial statements allow. In the alternative at least 3-5 years. Anyway, you are probably an offer candidate. If you fill out the offer form prior to the deadline given to you by the IRS collection person, and meet the other requirements, then submit the offer to the IRS in place of doing a payments plan. If you can’t submit it by the deadline, give them the 433A and/or 433B information with backup and request time to do an offer. You should be able to get it.
- c) You hardly have any assets, maybe $5,000 worth, and you can pay $1,000 per month. This is close. You’re probably not an offer candidate, but you will have to argue a longer payout, probably by signing a 2751 extension, giving them additional time, past the statute of limitations on collections, to collect the money. You should agree to this so you can get your payment plan or offer.
- d) You hardly have any assets, maybe $5,000 worth, and you can pay $1,000-$2,000 per month, then move forward with the agreement or offer. But wait, even though the financial statements say so, you really can’t afford $1,000 per month. Well too bad says the IRS. You do not have a choice. If you don’t agree we will take levy and seizure action till the debt is paid! This is why you always seek to have a binding agreement or an accepted offer.
It is your job, before you turn in the 433A and 433B, to have it show, or “paint the picture” of the lowest monthly payment amount, and least asset liquidation that you can afford! If you want to liquidate more assets, like your home for instance, that’s o.k. It will lower all the interest and penalties that are accruing. If you want to pay a larger monthly payment, then do so at your option. You don’t want to be obligated to pay more than the minimum you can afford.
If you make additional payments, or increase your monthly payment voluntarily, the IRS won’t let you reduce your next monthly payment. For example you are required to pay $500 per month. One month you get “extra money” and pay an extra $10,000. The next month you can only pay $450 (not the whole $500.) This will break your agreement. If this ever happens, or if you are short on a payment, call the IRS and tell them that you will be short and they will give you permission to pay later. You still technically broke your agreement in my opinion. And the IRS can take collection action anytime they want. However in my experience, I’ve never seen them do so under this circumstance.
Form – 433F
Most IRS collection personnel wants you to fill out the 433a to present your personal income and expenses to them, and a 433b to present your (non salaried or non W-2) income and related expenses, assets and liabilities to them. Sometimes ACS will demand that you fill out and send in the 433f form. I’ve tried in the past to get them to accept the other forms, since it gives a larger and more detailed picture of the taxpayer’s situation. They insist that they will only accept the 433f form. I suggest you lay everything out on the 433a and if needed the 433b, figure out your table allowances and get an idea of what your monthly payment should be, and then transfer it to the 433f. Anything that doesn’t fit, put on a separate attached sheet. You are entitled to all IRS allowable expenses whether or not you can fit them on the forms! Then, do your formal request for an installment agreement in a separate letter and include it with the form 433f and the required backup.
Remember, even if they ask for 3 months of receipts, ask yourself if 3 months gives an accurate description of what you can pay each month? If you extend it to 4 months, or 5,6,7 etc. will that give you less income or more expenses because of additional recurring medical bills paid? Also, document your expenses with the most extensive amount of backup receipts, cancelled checks, doctors letters, etc. And then ask yourself if you gave it to the high school kid next door, would they understand what you are trying to say? Will they think your support proves you actually paid what you are saying you did?
This form is very similar to the 433a, refer above for explanations.
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