IRS form 433 is the primary tool the IRS collection unit and IRS revenue officers use to get your information. If you are an individual that owes almost any type of tax and you don't qualify for a "time-based" agreement, you'll likely need to provide a completed 433a and some accompanying documentation. If you own a business, that business would need to supply a form 433b.
This form can be more complex than it appears. On it's face, the 433 appears to be simpler and even shorter than the intake form at a Lawyer's office. It's only a few pages long and the questions appear straightforward. There are dangers however, in treating this form as if it's "simple".
When you understand how the IRS is allowed to view your financial information when determining whether you are a candidate for an offer in compromise or what type of payment plan you qualify for, you begin to understand why a mistake when supplying these numbers can mean so much.
Incorrect Numbers Example 1:
Mr. and Mrs. Smith are self-employed. In 2013 their business' net income (income after all actual expenses) averaged $13,000.00 per month. They had a tax debt and filled out a form 433-A on their own. When doing this they estimated how much they believed their 2014 income would be and estimated lower than the 2013 total. They also included in their business expenses the depreciation related to a piece of equipment and the mileage deduction related to a vehicle. They filed the 433-A along with a 656 form for an offer in compromise. When the IRS got around to reviewing the 433-A, it noticed the discrepancy between the 2013 actual income, the last 3 months income and the estimated income in the 433-A. It also noticed that the business expenses in the 433-A didn't match the income and business documentation supplied to the IRS. It disallowed the numbers. They didn't jive with the facts and this added $1700.00 per month to the amount the Smith's had calculated as the net income. With this additional $1700.00, the IRS believed that the Smiths could afford to pay the entire tax debt over the remaining CSED and rejected the Offer. The IRS kept the 20% down on the offer that was paid with the financial documents and then used the 433a as a roadmap to get to the Smith's accounts and assets.
Incorrect Numbers Example 2:
Mrs. Henry received $1500.00 per month from social security and still worked. Her job netted her another $1500.00 per month. She had some old tax debt and attempted to provide the IRS with a financial statement. When she filled it out she told the truth about the fact that she had been paying $350.00 per month toward her credit card debt. The IRS doesn't consider credit card payment as a separate budget item in an offer in compromise and considered the $350.00 as excess income. It multiplied the $350.00 by the amount of months remaining in the statute period and determined that Mrs. Henry could afford to pay the debt in full before the Statute ran out. Her offer was rejected. The IRS kept her monthly payments and used her 433a information to levy her bank account when she didn't respond to the rejection notice.
In both of these examples, some thought and pre-planning may have prevented the outcome. Sometimes an offer or a payment plan request can be made at a different time, and sometimes good-faith budget planning and asset planning can be done to make the outcome better.
If you don't understand the rules for the calculation of offers in compromise, payments plans, and bankruptcy, you don't know how many problems can arise when filing the 433.
Sometimes people get in trouble for providing incorrect information on the form 433A. They lie outright, or the IRS takes the position that the information provided was incorrect and purposely so… even though the incorrect information was inadvertently provided.
This document is a “serious” document. It's signed under the penalty of perjury and if it can be shown that some intent was involved in skewing the information, fines and jail time are theoretically possible.
There are a few areas in the 433a form where information about assets are requested. The IRS is asking for this information primarily to calculate the value of available assets and determine whether it wants that value included in an offer in compromise or whether it wants to demand liquidation of the assets before setting up a payment plan.
Simple enough as long is you understand how asset valuation is done. If you do, you can use the numbers when calculating the offer in compromise amount.
Asset Matter Example – Know the Rules
Mr. Franklin owned a business. He was self-employed. The business had a few pieces of machinery that weren't used to run the business. Mr. Franklin had read somewhere that business assets weren't countable in calculating asset value in an offer in compromise. He missed the part about assets that are being used to create the income aren't countable but the income is.
He submitted a form 433a and although he disclosed the assets, he valued them at zero. The IRS was unaware of these assets previously and when it learned of them it conducted a valuation, rejected the offer and then moved to seize the assets forcing Mr. Franklin into a chapter 13 bankruptcy.
Another area where assets matter is in the area of transfers. The IRS is lurking and watching this one closely. The form 433a asks whether you have transferred anything in the last 10 years for less than market value.
Transfer of Asset Example
Mr. Azzari owned a business that had a serious tax debt. That business had a number of accounts receivable and those accounts receivable had a real value. Mr. Azzari transferred the accounts receivable to a “sister” entity, and then a few years later had the business submit an offer in compromise. The IRS rejected the offer and the Tax Court confirmed that the offer rejection was fine because the transferred assets weren't disclosed and included in the value of the offer. The sister company obtained the accounts receivable without paying fair market value for them so the Court considered the transfer to be fraudulent as well.
We see people who have transferred assets well before the tax debt became an issue. This isn't fraud in the same sense as in the Azzari example, but it's possible that those assets could be considered part of the offer amount as well. Or at least failure to disclose the transfer… could result in rejection.