Section 1. Financial Analysis Handbook

(1) This transmits revised IRM 5.15.1, Financial Analysis, Financial Analysis Handbook.

Material Changes

(1) The following table outlines changes made to IRM 5.15.1:

Effect on Other Documents

Audience

Effective Date

Kareem Williams
Acting Director, Collection Policy

Program Scope and Objectives

1. 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.
2. Audience : Collection employees are the primary users of this IRM.
3. Policy Owner : Director, Collection Policy, SB/SE is the policy owner of this IRM.
4. Program Owner : SBSE Collection Policy, Offer in Compromise (OIC) is the program owner of this IRM.
5. Primary Stakeholders : Collection employees and managers are the primary stakeholders for this IRM.
6. 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.

Background

1. This section provides procedural guidance to be followed by Collection employees when 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. These procedures are based on and consistent with the Internal Revenue Code and Regulations.

Authority

1. The following authorities provide the basis for these guidelines:

• IRC 6103
• IRC 6323(c)
• IRC 6323(d)
• IRC 6672
• IRC 6901
• Bankruptcy Code section 341
• 26 CFR 301.6343-1(b)(4)

Responsibilities

1. Director, Collection has executive oversight for all Collection programs.
2. Director, Headquarters Collection has executive oversight for all Headquarters Collection programs.
3. Director, Collection Policy is responsible for the policies and procedures within the Financial Analysis program.
4. Director, Field Collection has executive oversight for all Field Collection programs.
5. Field Collection area directors, territory managers and group managers are responsible for ensuring compliance by field personnel with these procedures.
6. Revenue officers and other IRS Collection personnel are responsible for reading, following and implementing the procedures listed in this IRM.

Program Management and Review

1. Program Reviews: Operational reviews are conducted by the Collection Area Directors and Territory Managers annually to evaluate program delivery and conformance to administrative and program requirements. Group managers participate in one or more Embedded Quality (EQ) consistency reviews each year to assist in rating EQ attributes. Group managers perform annual and periodic case and performance reviews as described in IRM 1.4.50, Resource Guide for Managers, Collection Group Manager, Territory Manager and Area Director Operational Aid.. Collection Policy performs periodic program reviews to identify trends and opportunities for improvement.
2. Program Reports: Collection managers utilize reports generated from the Integrated Collection System (ICS) and the ENTITY Case Management System to monitor and track inventory assignments and timely and appropriate case actions. Reports from the Embedded Quality Review system provide review information for managerial use in guiding revenue officers to promote timeliness, effectiveness, and accuracy of case actions.
3. Program Effectiveness: National Quality Reviews and consistency reviews are routinely conducted to measure program consistency, effectiveness in case actions, and compliance with policy and procedures. Trends reported in these reviews are used to promote and improve program effectiveness. Trends, recommendations and corrective actions issued during the course of program and operational reviews are used to identify opportunities for improvement and achieve program goals.

Program Controls

1. Collection managers verify program and procedural compliance by conducting case consultations, case reviews, performance reviews, and security reviews. Prescribed internal controls are detailed in IRM 1.4.50, Resource Guide for Managers, Collection Group Manager, Territory Manager and Area Director Operational Aid, which communicates responsibility to Collection managers for promoting quality case work and required internal controls. The ICS, ENTITY Case Management, Embedded Quality Review, and National Quality Review Systems provide the case access, data and reports used by managers to monitor internal controls.

Terms/Definitions/Acronyms

1. The table below lists common terms, definitions and acronyms used in this section.

Related Resources

1. IRM resources:

• IRM 5.1.18.5, Department of Motor Vehicles
• IRM 5.1.18.12, United States Passport Office
• IRM 5.1.18.13, TECS
• IRM 5.1.18.17, Foreign Bank and Financial Account Report
• IRM 5.1.18.19, Consumer Credit Reports
• IRM 5.1.21, Collecting from Limited Liability Companies
• IRM 5.7, Trust Fund Compliance
• IRM 5.7.5.2, Collectibility
• IRM 5.7.8, In-Business Repeater or Pyramiding Taxpayers
• IRM 5.8, Offer in Compromise
• IRM 5.8.1, Offer in Compromise, Overview
• IRM 5.10, Seizure and Sale
• IRM 5.10.1, Pre-Seizure Considerations
• IRM 5.10.1.4, Will Pay, Can’t Pay and Won’t Pay Factors
• IRM 5.11, Notice of Levy
• IRM 5.11.6.3, Funds in Pension or Retirement Plans
• IRM 5.11.6.6, Federal Contractors
• IRM 5.11.6.7.2, Medicare Payments Paid to Providers
• IRM 5.12, Federal Tax Liens
• IRM 5.12.2, Notice of Lien Determinations
• IRM 5.12.10.6.2.2, Subordination to Reverse Mortgages
• IRM 5.14.1, Securing Installment Agreements
• IRM 5.14.1.4.1, Six-Year Rule and One-Year Rule
• IRM 5.14.2.2.1, Partial Payment Installment Agreement Requirements
• IRM 5.16.1, Currently Not Collectible
• IRM 5.16.1.2.9, Hardship
• IRM 5.17.1.2, Local Law Section
• IRM 5.17.2.5.2.1, Community Property
• IRM 5.17.2.6, Priority of Tax Liens: Specially Protected Competing Interests
• IRM 5.17.2.6.6.1, Commercial Transaction Financing Agreements
• IRM 5.17.3 ,Levy and Sale
• IRM 5.17.3.10.19, Pension and Retirement Benefits
• IRM 5.17.7.1.1.3, Partners/Members
• IRM 5.17.14, Fraudulent Transfers and Transferee and Other Third Party Liability
• IRM 13.1.7.2, TAS Case Criteria
• IRM 25.1, Fraud Handbook
• IRM 25.5, Summons
• IRM 25.27, Third Party Contacts

• Allowable Living Expense web page:http://mysbse.web.irs.gov/collection/toolsprocesses/AllowExp/default.aspx
• Collection Financial Standards:https://www.irs.gov/businesses/small-businesses-self-employed/collection-financial-standards

Overview and Expectations

1. 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).

Note:

If a taxpayer states during any interview that he or she wishes to consult with an authorized representative, the employee will suspend the interview to permit such consultation. See IRM 5.1.10.7.1, Rights During Interviews

1. Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals
2. Form 433-B, Collection Information Statement for Businesses
3. Form 433-F, Collection Information Statement - Used by the Automated Collection System (ACS) and the campuses for individuals.

• For Trust Fund Recovery Penalty (TFRP) investigations when the individual is a wage earner and the potential TFRP is less than $100,000. See IRM 5.7.5.2, Collectibility, and
• For self-employed and individual wage earners who owe for IMF liabilities only, with an aggregate balance of assessments less than $250,000.

Exception:

Form 433-F cannot be used for Offer-in-Compromise cases or for cases designated as Abusive Tax Avoidance Transactions (ATAT).

Reminder:

Cases on partnerships and single member owner limited liability companies (LLCs), where the individual owner is identified as the liable taxpayer, require an analysis of the business income and allowable business expenses reported on Form 433-B, as well as the individual income and allowable living expenses of the partners or owner reported on Form 433-A. Cases on LLCs, where the LLC is identified as the liable taxpayer, require an analysis of business income and allowable business expenses reported on Form 433-B. In some cases, Form 433-A may be needed to determine a reasonable compensation for the owner to be reported on Form 433-B.

Note:

The revenue officer has the discretion to provide the financial statement to the taxpayer in advance when there is a planned field visit with the taxpayer to discuss the CIS during the interview.

Exception:

If travel costs are a concern, discuss the case with your manager and document the case history if a field call will not be made. For example, if travel is limited or restricted by the budget, or if due to the distance for a follow-up field visit, it would not be an efficient and economical use of travel funds.

Note:

Reminder:

Verification of assets through on-line or courthouse records does not replace the physical verification of assets during a field call.

Note:

Substantiation can consist of credible verbal communication or written documentation received from the taxpayer. Both types of substantiation should be thoroughly documented in the case history.

Example:

Taxpayer's income dropped significantly from the prior year and taxpayer explains that he went through a divorce and is no longer claiming two incomes. Verbal substantiation supporting the drop in income should be documented in the case history.

• Bank statements or canceled checks
• Credit card vouchers
• Rent/lease receipts and lease agreements
• Payment coupons
• Court orders
• Contracts
• Future expenses, e.g., the birth of a child or the necessary replacement of a car that will increase expenses
• Taxpayer statements or written communications
• Tax statements and tax returns that will provide evidence of actual expenses

Example:

A taxpayer with physical disabilities or an unusually large family requires a housing cost that is not anticipated by the local standard. The taxpayer is required to provide copies of mortgage or rent payments, utility bills and maintenance costs to verify the necessary amount.

Reminder:

If a collection employee and taxpayer disagree about an economic hardship determination, the taxpayer should be referred to the Taxpayer Advocate Service. See IRM 13.1.7.2, TAS Case Criteria.

1. Advise the taxpayer that the IRS expects a payment equal to the amount in excess of necessary expenses and any allowable conditional expenses and, explain to the taxpayer how the amount expected was calculated.
2. Advise the taxpayer that he/she is responsible for determining what buying or spending modifications are needed in order to pay their liabilities. Do not tell the taxpayer what he/she can or cannot own or spend.

1. Request payment in full or in part from available assets.
2. Make a notice of lien determination. See IRM 5.12.2, Notice of Lien Determinations.
3. Initiate enforcement action if assets are available to pay the liability and the taxpayer is unwilling to voluntarily convert assets to cash. See IRM 5.10.1, Pre-Seizure Considerations.
4. Enter into an Installment Agreement. See IRM 5.14.1, Securing Installment Agreements.
5. Report the account Currently Not Collectible. See IRM 5.16.1, Currently Not Collectible.
6. Explain the Offer in Compromise provisions. In cases where an offer in compromise appears to be a viable solution to a tax delinquency, the IRS employee assigned the case will discuss the compromise alternative with the taxpayer and, when necessary, assist in preparing the required forms. See IRM 5.8.1, Offer In Compromise, Overview.

Analyzing Financial Information

1. 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.
2. Analyze assets to resolve the balance due accounts.

1. Request immediate payment if the taxpayer has cash equal to the total liability.
2. Identify key sources of funds.
3. Identify liquid assets which can be pledged as security or readily converted to cash. (For example, equipment or factoring accounts receivable.)
4. Consider unencumbered assets, equity in encumbered assets, interests in estates and trusts, and lines of credits from which money may be borrowed to make payment.
5. Consider taxpayer's ability to get an unsecured loan.
6. Determine the priority of the Notice of Federal Tax Lien when considering whether to allow or disallow payments to other creditors. See IRM 5.17.2.6 , Priority of Tax Liens: Specially Protected Competing Interests.

Example:

Car insurance may be paid monthly, quarterly, twice a year or yearly. For purposes of calculating monthly income compute the total cost for the year and divide by 12.

Verifying Financial Information

1. 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:

1. How the taxpayer generates income, both foreign and domestic
2. The nature of their business process
3. The main products/services, type of customers, wholesale vs. retail, etc.
4. Major suppliers and competitors
5. Assets held in the name of the taxpayer or on their behalf, both foreign and domestic
6. Personal assets or investments like stocks, mutual funds, certificate of deposits, IRAs, 401(k) plans.
7. Virtual currency which includes cryptocurrency (e.g. Bitcoin, Ethereum, Ripple, and Litecoin)
8. Type of internet presence the taxpayer may have

Note:

Example:

If the previous revenue officer has completed a full CIS analysis within the last 12 months including verification of assets, income, and expenses and has made a determination of the fair market value of assets, equity in assets and monthly ability to pay, the information should not be reinvestigated unless there is reason to believe the taxpayer's situation has significantly changed.

Exception:

If a taxpayer claims more than the total allowable amount for the five categories of National Standards for Food, Clothing and Other Items, the taxpayer is only required to substantiate expenses for the categories that exceed the standards. The standard amounts will be allowed for the remaining categories without substantiation.

Example:

Taxpayer claims the lease payment of an automobile for business. That expense will not be allowed as part of the transportation expense on Form 433-A. If a taxpayer claims a vehicle for both business and personal use, ensure that the allowable expense is not duplicated.

• "Non-cash expenses" such as depreciation or amortization of assets
• "Book value" vs. Fair Market Value (FMV)
• Non-payment of accounts receivables (in dispute)
• Down-sizing/insolvent (a viable business)
• Roommate(s) or rental income
• Commingling of funds between related or unrelated entities

Examine prior year returns to detect sporadic income. Review bank deposits for at least 3 months to determine the taxpayer's stated income.

Shared Expenses

1. 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.
2. 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.

Reminder:

Community Property States: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In addition, Alaska is an opt-in community property state; property is separate property unless both parties agree to make it community property through a community property agreement or a community property trust. The territories of Puerto Rico, Guam and the Commonwealth of the Northern Mariana Islands also allow property to be owned as community property. See IRM 5.17.2.5.2.1, Community Property.

Note:

Since the facts of each individual case and state law determine if the taxpayer has a property right or right of reimbursement, Revenue Officers and Advisory should seek Counsel advice when these types of issues arise in determining the taxpayer’s interest for calculating income or equity in assets and any other collection alternative calculations.

1. Determine the total actual household income and expenses.
2. Determine what percentage of the total household income the taxpayer contributes, i.e., taxpayer's income divided by total household income.
3. Determine allowable expenses.
4. Determine which expenses are shared and which expenses are the sole responsibility of the taxpayer, e.g., child support, allowable educational loan, union dues.
5. Apply the taxpayer's percentage of income to the shared expenses.

Note:

The investigating employees should judge each case based on its own applicable facts and circumstances.

Example:

Taxpayer’s income of $20,000 plus non-liable person's income of $5,000 equals household income of $25,000. Divide the taxpayer's income of $20,000 by household income of $25,000 to determine the taxpayer’s share of the household income which would be 80 percent in this instance. Multiply the taxpayer’s allowable shared expenses by the calculated household income percentage of 80 percent. This represents the taxpayer’s shared allowable expenses. The taxpayer would also be allowed 100 percent of expenses which are his/her sole responsibility, unless they are expenses covered by the Allowable Living Expense standards.

Example:

One method for calculating the liable taxpayer's ability to pay is to determine the income percentages as stated in IRM 5.15.1.4(3). After determining the percentage of income of the liable taxpayer, that percentage is multiplied against the ALE standard amounts for the household. If the taxpayer's calculated percentage amount for National Standards for Food, Clothing and Other Items and for Out-of-Pocket Health Care Costs, is less than the standard amount for one person, the liable taxpayer will be allowed the standard amount. For the other ALE expenses (Transportation and Housing/Utilities), the liable taxpayer will be allowed the calculated percentage amount or the standard amount, whichever is less. The calculated percentage can also be applied to other shared expenses, such as family health insurance. Consideration should also be given to any separate expenses the liable taxpayer may be solely responsible for paying, such as alimony, child care, etc.

Note:

If the vehicles are not owned jointly, the liable taxpayer would be allowed actual expenses paid for the vehicle he/she owns. The percentage method can be applied if two vehicles are jointly owned, but the maximum expense allowed for the liable taxpayer will be the standard amount for one vehicle.

Note:

In the situation where the taxpayer is renting an apartment or room and the owner of the property is the non-liable person, the rental agreement or signed statement from the owner of the property should support the decision to not require the owner to divulge any personal information regarding income or household expenses. In these cases, the investigating employee should accept the information provided by the taxpayer and make a determination based on that information.

Example:

Taxpayer shares expenses with a roommate. In this situation the taxpayer receives the full National Standard for one person and the full Out of Pocket Health Care Standard for one person. The taxpayer would receive the amount actually paid up to the maximum amount of the Local Housing and Utility Standard and Local Transportation Standard.

Internal Sources and Online Research

1. When required, verify as much of the financial statement as possible through internal sources and online research (see table below).
2. 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.
3. 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.

1. Schedule A: itemized deductions such as mortgage interest
2. Schedule B: interest and dividends
3. Schedule C: self employment income
4. Schedule D: capital gains or losses
5. Schedule E: rental or other investment income, net operating loss deduction
6. Schedule F : farm income
7. Schedule K-1: partnership income/interest

• Compare the amount of reported income to that declared on the CIS.
• Compare the value of assets and the amount of reported depreciation to the asset values declared on the CIS. The true value of an asset may not be shown on Form 4562, Depreciation and Amortization (Including Information on Listed Property) or the depreciation work papers.
• Check the location of depreciable assets.

• Identify assets not reported on CIS such as certificates of deposit, investment accounts, virtual currency which includes cryptocurrency (e.g. Bitcoin, Ethereum, Ripple, and Litecoin) etc.
• Verify sources of income, such as employers, bank accounts, retirement accounts.
• Identify recently dissipated assets.
• Identify income reported on Form 1099-K, Payment Card and Third Party Network Transactions.
• Identify Foreign Bank and Financial Account Report (FBAR) transactions.

• Check IRPTR to see if the taxpayer filed a Report of Foreign Bank and Financial Accounts, FinCEN Form 114 (formally TD F 90-22.1), which indicates the taxpayer has a financial interest in, or signature authority over, a foreign financial account that has an aggregate value greater than $10,000, at any time during a calendar year.
• Conduct Financial Crimes Enforcement Network Query (FCQ) research for specific information reported on the FBAR. See IRM 5.1.18.17, Foreign Bank and Financial Account Report.

Check IDRS command code RTVUE to determine if the taxpayer has filed Form 8938.

• The “CC CD” indicator (or Computer Condition Code) will include an “H ” to indicate that Form 8938 was filed.
• If Form 8938 has been filed, ESTAB the return or use the Employee User Portal (EUP) to view the foreign account or asset listed on the form.

Note:

Revenue Officers may request FATCA data research on their assigned taxpayer case. To find out how to access FATCA data, see IRM 5.20.12.11, Foreign Account Tax Compliance Act (FATCA) Reports.

• Identify motor vehicles registered to the taxpayer but not declared on the CIS. See IRM 5.1.18.5, Department of Motor Vehicles.
• Check for ownership in business names or lien holders.

Note:

• Check courthouse records for grantor/grantee, mechanic liens, mortgagee/mortgagor, divorce records, death certificate, and registered wills.
• Identify real property titled to the taxpayer but not declared on the CIS.
• Identify property held by transferee, nominee or alter ego. See IRM 5.17.14, Fraudulent Transfers and Transferee and Other Third Party Liability.

Note:

• Identify past residences and employers.
• Verify competing lien holders, balances due and payment history.
• Identify property not listed on CIS.
• Identify other creditors as leads to undisclosed assets.
• Identify financial institutions which the taxpayer has conducted business with, both past and present.
• Look for entities and associations with foreign banks and corporations.
• See IRM 5.1.18.19, Consumer Credit Reports, for requirements and procedures for ordering credit reports.

• Identify current real property, transferred or sold property.
• Identify vehicle ownership.
• Identify interest in partnerships, corporations or other businesses.
• Identify potential third parties residing with the taxpayer.
• Look for vessels and crafts registered with the Federal Aviation Administration (FAA).

• Look for income sources and assets on a taxpayer's web site.
• Determine the value of assets when traditional sources have been unproductive.
• Identify undisclosed business activity and assets.
• Locate a taxpayer when traditional sources have been unproductive.
• Gather news articles and publications on high profile taxpayers.
• Secure general information about a taxpayer's industry, such as financial data and the legal environment for that type of business.

• Identify related entities, including shareholders and partners.
• Look for an analysis of the relationships between the associated entities.
• Identify "footprints" which may indicate shelter activity.
• Look for a visual representation of structure and linkages between the taxpayer and related entities.

• Provides linked data and graph analytics capabilities for a range of taxpayer related entities, including businesses (EINs), individuals (SSNs), paid preparers (PTINs), and information about each of those individuals and their relationships.
• Pulls data from the Compliance Data Warehouse (CDW), which is not an authoritative source and therefore, the CKGE should be used in conjunction with other IRS production systems such as IDRS.
• Identifies linkages between individuals, businesses, and preparers that are not easily detected, such as power of attorney, bank account connections, and spousal and dependent relationships. Potential patterns of noncompliance may be identified to inform case development.
• Identifies EINs that an individual or entity has applied for via Form SS-4 data, as well as employees of said business. This is captured through 1099-MISC, W-2 and 1040 Schedule C data.
• Contains reports that compares employer versus employee W-2 wages, withholding, and Medicare amounts. Reports are also available for 1099-MISC and Form 1098 “Mortgage Interest” amounts
• Provides the manager of every CKGE user access to the Manager Account Module which allows review of activity logs of their employees’ search history as an internal control, regardless of having access to the tool themselves.
• To gain access, a BEARS request must be submitted for PROD USER CDW GRAPH DATABSE (CDW-UNMASKED TINS).