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How IRS Verifies Financial Information on the 433A or the 433B.
When conducting interviews to secure and/or review financial statements, the IRS will 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.Type of internet presence the taxpayer may have.
IRS will observe and document the physical layout of the business, the number of employees, the type and location of equipment, machinery, vehicles and inventory. A brief tour of the business premises may help to gauge the business operation and the condition of assets.
A thorough verification of the Collection Information Statement (CIS) 433A and 433B involves reviewing information available from internal sources and requesting that the taxpayer provide additional information or documents that are necessary to determine reasonable collection potential. Consider contacting third parties to verify or obtain information.
IRS Collection issues that have been previously addressed during a balance due investigation by field personnel in the preceding 12 months will not be re-examined unless there is convincing evidence that such reinvestigation is absolutely necessary.
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 Fair Market Value of assets, equity in assets and monthly ability to pay, the information should not be re-investigated unless there is reason to believe the taxpayer’s situation has significantly changed.
A taxpayer may be required to substantiate expenses that are categorized as Local Standards or Other Expenses
Substantiation of expense amounts could include the following items: bank statements, credit cards vouchers, rent/lease receipts and leases, payment coupons, court orders, contracts, and canceled checks. Document how obligations are being met and the source of funds. Taxpayers who own real estate should provide documents showing the monthly payment, the purchase price, date of purchase, and the principal amount due. When obtaining documents for substantiation, ask the taxpayer for copies, not original documents. If necessary, secure telephone numbers and contact names of creditors. These can be used if verification is necessary.
When analyzing expenses for a business taxpayer, the IRS will ensure that business expenses are not included under personal expenses. IRS will compare the 433-A and 433-B to income tax returns to verify assets and income or analyze bank deposits.
Taxpayer claims the lease payment of an automobile for business. The expense will not be allowed as part of the transportation expense on the 433-A. If a taxpayer claims a vehicle for both business and personal use ensure that the allowable expense is not duplicated.
IRS will secure third party information such as bank deposit records, government agency records, competitors or suppliers to determine the source of funds of the taxpayer.
Compare income to expenses. If expenses exceed income, ask the taxpayer probing questions to determine alternate sources of income that may be supplementing his/her income.
IRS will look for and consider:
1. “non-cash expenses” such as depreciation or amortization of assets
2. “book value” vs. Fair Market Value (FMV)
3. non-payment of accounts receivables (in dispute)
4. down-sizing/insolvent (a viable business)
5. roommate(s) or rental income
6. commingling of funds between unrelated entities
On business accounts, IRS will determine if there are “non-cash ” expenses such as depreciation or amortization. Also consider a commingling of funds between related entities. Examine prior year returns to detect sporadic income. Review bank deposits for at least 3 months to determine the taxpayer’s stated income.
For Shared Expenses
Generally, a taxpayer will be allowed only the expenses they are required to pay. Consideration must be given to any other income into the household and any expenses shared with a non-liable person.
Generally, the assets and income of a non-liable person are excluded in the computation of the taxpayer’s ability to 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.
Community Property States: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. (IRM 5.17.2.4.2.1) 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 and Guam also allow property to be owned as community property.
Regardless of whether community property laws apply, IRS will secure sufficient information concerning the non-liable person to determine the taxpayer’s proportionate share of the total household income and expenses. Review the entire household’s information and:
Determine the total actual household income and expenses.
Determine what percentage of the total household income the taxpayer contributes, i.e., taxpayer’s income divided by total household income.
Determine allowable expenses.
Determine which expenses are shared and which expenses are the sole responsibility of the taxpayer, e.g., child support, allowable educational loan, union dues.
IRS will apply the taxpayer’s percentage of income to the shared expenses.
