Offer in Compromise: Documenting the Value of Assets

Published Categorized as IRS Liens & Levies, Offer in Compromise
Offer In Compromise: Documenting The Value Of Assets, Houston Tax Attorney

The IRS carefully examines the value of the taxpayer’s assets when it considers whether to accept an offer in compromise based on doubt as to collectiblity. Even a few dollars can result in a rejected offer. Substantiation is key. The Wright v. Commissioner, T.C. Memo. 2008-259, case is an example. It involves a $2,000 offer that was rejected for a $3,000 discrepancy that was not well documented.

Facts & Procedural History 

Mr. Wright filed income tax returns for 1993, 1994, and 1995 late.

He filed income tax returns for 1996, 1999, and 2000, but failed to pay all of the tax reported on the returns.

The IRS issued Mr. Wright a Final Notice of Intent to Levy for 1993, 1994, 1995, 1996, 1999, and 2000.

Mr. Wright submitted a Form 12153, Request for a Collection Due Process Hearing.

The IRS Appeals Requests

The IRS Settlement Officer requested the following information:

  • A completed Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B, Collection Information Statement for Businesses;
  • Copies of bank statements for the past three months;
  • Copies of wage statements for the last three pay periods;
  • Copies of a mortgage statement or rental agreement; and
  • Copies of life and health insurance policies, if applicable.
  • Mr. Wright submitted Form 433-A on which he indicated that he was a single, self-employed individual operating “Wright Way Const” and that he had $1,405 of monthly income and $1,955 of monthly living expenses.

As for assets, Mr. Wright submitted: copies of statements of accounts held at a credit union showing deposits totaling $800 and $2,326.52 and statements for a checking account showing no activity. Mr. Write also indicated that he owned two automobiles valued at $1,000 and $500, real estate valued at $40,000 subject to a loan balance of $27,000, furniture/personal effects valued at $750, horses valued at $1,250, and tools used in business valued at $1,500 subject to a loan balance of $1,000.

Mr. Wright intended to submit an offer in compromise for $2,000.

The IRS Appeals Officer’s Adjustments

The IRS settlement officer made the following four adjustments to the income and expenses reported on the Form 433-A:.

  • She increased net monthly income from business to $3,700. She calculated the net monthly income from business by totaling the amounts on copies of 10 checks attached to the
  • Form 433-A and dividing the total by 2.75.
  • She also increased the monthly housing and utilities expenses to $649, the maximum allowed under the national standards.
  • She increased the transportation expense to $300 in accordance with the applicable standards. Finally, she decreased the health care expense to $200.

The IRS settlement officer then subtracted the adjusted monthly living expenses from the adjusted monthly gross income and determined that Mr. Wright had excess monthly income of $1,596.

The IRS settlement officer also conducted an online search to determine Mr. Wrights assets and found several addresses listed for Mr. Wright and several vehicles registered in the State of Mississippi under the name “Lee Henry Wright.” Based on this, the IRS settlement officer sustained the notice of intent to levy.

Mr. Wright’s representative explained that the only real estate Mr. Wright owned was the property reported on the Form 433-A. He provided an affidavit in which Mr. Wright swore that he at no time owned any of the vehicles registered in Mississippi to “Lee Henry Wright.”

The IRS settlement officer concluded that the reasonable collection potential given Mr. Wright’s assets and future income was $82,908 and she suggested an installment agreement of $1,596 a month. Thus, the IRS settlement officer rejected Mr. Wright’s $2,000 offer in compromise and Mr. Wright asked the tax court to review the case again.

Mr. Wright asked the tax court to review this determination and the court remanded the case to Appeals to reconsider.

The Value of the Taxpayer’s Assets

The court had this to say:

Although we have some concern that Ms. Alcorte’s analysis of petitioner’s future income was incomplete and her determination of petitioner’s future income potential was flawed, we do not need to reach this issue in deciding whether her determination to sustain the proposed levy was an abuse of discretion. Petitioner submitted an offer-in-compromise of $2,000. The offer-incompromise was $3,000 less than net realizable equity in real estate and $4,250 less than net realizable equity in real estate and horses he owned when he submitted the offer-in-compromise. We conclude that the offer-in-compromise was less than net realizable equity in petitioner’s assets, and this fact alone justified Ms. Alcorte’s rejection of the offer-in-compromise.

The court noted that Mr. Wright did not substantiate the value of his house, as he failed to properly document the necessary repairs.

Thus, Mr. Wright’s offer in compromise was not accepted as it was less than the equity he had in his assets. The court authorized the IRS to continue with its collection actions.

This result could probably have been avoided by having an appraisal for the property.

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