Proration of Expenses in an Offer in Compromise

Roni Deutch
August 6, 2009 — 1,732 views  
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Before the Internal Revenue Service (IRS) accepts a taxpayer's Offer in Compromise, or places his balances in Currently Not Collectible status, or agrees to an Installment Agreement, they will first request a Collection Information Statement (CIS). The CIS is the taxpayer's financial information statement attesting to his income, expenses, and assets.

The IRS requests a taxpayer's CIS for a variety of reasons. The IRS reviews the CIS to:

1. determine whether the taxpayer can full pay; 2. determine whether the taxpayer can borrow against assets; 3. determine whether the taxpayer can make monthly payments and how much; or 4. determine whether the taxpayer has no ability to make any kind of payments.

Non-Liable Parties

A non-liable party is anyone living in the same household with the liable taxpayer (i.e. the person who owes the back tax liability). As the name indicates, a non-liable party does not owe any part of the liable party's back tax liability. However, by virtue of the fact that both the liable and non-liable parties live in the same household, the Internal Revenue Manual (IRM) sets forth that the IRS must give consideration to other income in the household (other than that of the liable party) as well as expenses shared with a non-liable party.

In theory, analyzing all household income and determining all the shared expenses provides the most accurate financial situation for the taxpayer. However, in practice, prorating expenses is more common in cases being reviewed for an offer in compromise or in cases where a Revenue Officer is assigned and charged with the duty to collect as much money from a taxpayer as possible. In both of these situations, the IRS employee is able to spend more time analyzing a taxpayer's financial statement. If prorating the taxpayer's expenses that are shared with a non-liable party works to the advantage of the IRS, the IRS will take the time to prorate it.

The majority of collection cases are handled by the Automated Collection Services (ACS) branch of the IRS. These are call centers throughout the country where representatives are trained to receive inbound telephone calls from taxpayers under the aggressive collection efforts of the IRS. Due to the number of calls and financial information statements a representative may take per day, a detailed proration analysis into the taxpayer's shared expenses with a non-liable party living in his household may be too cumbersome and somewhat time-consuming. In many cases, a representative may opt to not prorate expenses at all.

How to Prorate

Section 5.15.1.4 of the IRM provides a guideline for IRS employees when prorating expenses. These are the general steps:

1. Determine the total household income 2. Determine the total number of exemptions claimed/members in the household 3. Figure out the percentage of income the liable party contributes to the household 4. Determine which expenses are shared between the liable and non-liable parties (national standard, housing and utilities, car note payments, car operation expenses, or ongoing medical expenses) 5. Apply the liable party's percentage of income toward the shared expense

Why Prorate?

Preparing the proration calculation can be time consuming and confusing, especially if there are multiple non-liable parties involved, such as step-children, adult children, extended family members, friends, or roommates. In addition, the IRS representative may not even broach the notion of prorating expenses due to the cumbersome nature of it all.

About the Author

The Tax Lady Roni Deutch and her law firm Roni Lynn Deutch, A Professional Tax Corporation have been helping taxpayers across the nation find IRS tax relief for over seventeen years. The firm has experienced tax lawyers who can fight IRS tax liens on your behalf.

Roni Deutch