When you are ready to apply for an offer in compromise with the IRS, you must file Form 656, Offer in Compromise. If you earn a salary or are self-employed, you must also submit Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, as provided in the Form 656 booklet. Form 433-A calculates the minimum offer you can submit to the IRS as a compromise to your outstanding tax liability. The IRS will only accept offers below this minimum amount if you present evidence of certain special circumstances.
Before attempting your application, you should gather all the information needed to complete the Form 433-A. This move ensures that your application is complete and that the IRS will not reject it. Information needed for the form includes:
- Your average gross monthly household income
- Household expenses
- Cash and investment accounts
- Available credit
Keep in mind that when describing your household expenses, the IRS will not consider any of the following costs to be household expenses:
- Private school tuition
- College expenses
- Charitable contributions
- Credit card payments
- Any other unsecured debt payments
Completing the form
Section 1: In calculating your minimum offer, Form 433-A first requests certain personal and household information. The form asks about your marital status, whether you own or rent a home, and your tax dependents.
Section 2: The form next requests your self-employment information. This includes whether you file Schedule C for any business income, the frequency of your tax deposits, and your average gross monthly payroll. It also requests the form of your business.
Section 3: Next, the form asks for personal asset information. This includes your bank accounts, investment accounts, and retirement accounts. It also requests information on any insurance policies, real estate, vehicles, and other miscellaneous valuable items.
Section 4: This portion asks about the business assets you may own through your self-employment. It specifically refers to bank accounts and notes receivable.
Section 5: This section requests your business income and expenses. The form requests a breakdown of your gross monthly business income and total monthly business expenses. However, if you also provide a profit and loss report, you can present an average amount of these figures without having to provide such a breakdown. Additionally, you may use those income and expenses you have previously provided to the IRS on Schedule C. Yet, you must also submit a profit and loss statement in this latter case if the amount reported on your Schedule C has significantly changed in a previous year.
Section 6: You must also report your gross monthly household income and expenses. Household income includes wages, Social Security income, and pension payments. Your monthly household expenses include food, clothing, housing, and utilities.
Calculating the offer
After entering in your financial information, Form 433-A calculates your minimum offer amount. The form offers two calculation methods depending upon whether you plan to pay your offer in full within five months or beyond this date. Should you choose to pay sooner rather than later, you may calculate your minimum offer as follows:
[Household income in excess of expenses x 48] + Total available assets
If you choose to pay beyond the five month mark, your minimum offer increases to the following amount:
[Household income in excess of expenses x 60] + Total available assets
Regardless of which option choose, you minimum contribution amount must exceed zero.
Finally, Form 433-A requests certain miscellaneous information that it will consider in settling your tax debt. For example, this section asks whether you have filed for bankruptcy. This question is relevant because taxpayers are ineligible to apply for an offer in compromise on tax liability if they or their business is in bankruptcy. This section also asks if the taxpayer is the beneficiary of a trust, estate, or life insurance policy. Additionally, it asks whether you have sold any assets within the last 10 years at a discount.