Why the IRS Collection Information Statement, Form 433, Is So Important
If you’ve ever applied for a mortgage for a home, and it wasn’t a no or low doc mortgage, then you’re likely familiar with all of the paperwork involved. The lender in these cases is going to be giving a large sum of money to a complete stranger (you) for a loan that is written to span several decades of time. That is a major risk for the lender, even though it is secured by a physical piece of property. The lender wants to know everything there is about your financial condition in order to determine that you are, in fact, able to make the monthly payments on the mortgage, and are likely to do so.
If you’ve been through this process, you may have worked with a mortgage broker or loan officer. A mortgage broker is typically paid a large sum of money for doing the loan. This money generally comes out of the loan origination fee (typically ranging from 0.5% to 2% of the loan amount), and also what’s called a Yield Spread Premium (YSP), which is an amount paid by the lender to the mortgage broker as a sort of sales commission for using that particular lender. When you look at these fees, the mortgage broker is usually making several thousand dollars on the transaction.
What are you getting for that money? Well, the mortgage broker has two primary responsibilities. One is to make sure that nothing goes wrong with the loan, from application through funding. This is why the mortgage broker should be in frequent contact with you and be constantly reminding you to give him or her the documents needed by the underwriter. The second major job that the mortgage broker has is to sell the lender on giving you the loan, and doing so at the best possible rate and terms for YOU. They’re responsible for negotiating the best interest rate they can get for you, the best terms and conditions, and all with a minimal of hassle on your part.
So, what on Earth does ANY of that have to do with IRS collections when you owe back taxes? I want you to think of it as an analogy – dealing with the IRS is similar to dealing with an underwriter.
In the case of a client, our firm has been hired to deal with the IRS. We are specialists, just like mortgage brokers. A mortgage broker takes your loan application (called a Form 1003), which has a tremendous amount of personal financial information about you. The IRS wants the same thing, and the questions on the form 433 are actually surprisingly similar to a loan application.
After taking a complete and accurate loan application, the mortgage broker is then going to request copies of all sorts of financial documents from you. We’re talking bank statements, credit card bills, utility bills, a credit report, pay stubs, tax returns, etc. They are required to provide documented proof of your income and expenses to the lender, in order to try and get you that loan. We have to do the same thing with the IRS, and prove that your income and expenses really are what you say they are.
Then comes the negotiating time. A mortgage broker will work on your behalf to reduce your interest rate….reduce the points you pay on the loan…maybe get escrows for property taxes and insurance waived…get rid of a pre-payment penalty…get you a short period of interest only payments. When you work with a tax relief specialist like us, our goal is very similar. We make sure that you get all your ducks in a row, make sure that you qualify for a payment plan or a settlement. We work to get penalties eliminated from your tax accounts, negotiate you the lowest possible monthly payment or the lowest possible settlement on your tax debt, and make sure the IRS doesn’t garnish your wages or take money straight out of your bank.
Just like the mortgage broker, it all starts with that financial statement. There is, however, one huge difference between how we look at your financial information and how a mortgage broker or lender looks at it. Their job is to to make it look like you have plenty of money laying around and a maximum of disposable income every month. Our job is the exact opposite: We want to make you look as broke as we can in the eyes of the IRS, with the minimum of income and the maximum of expenses. In the eyes of the IRS, the less disposable income you have, the less of it needs to go to them. Even better, if you look upside down on paper, you may not have to pay anything each month. Throw in a negative net worth on your assets, and you may very well be that perfect, classic “pennies on the dollar” settlement that you see advertised all over the place.
This is why the Form 433-A, 433-B, or 433-F is so crucial to obtaining the best tax resolution possible. If you owe money to the IRS, the government looks at it as if you are taking an unauthorized loan from the U.S. Treasury. Tack on as much as a 60% rate for penalties and interest together, and you’re almost better off borrowing the money from your corner loan shark. When you end up face to face with the single largest collections agency in the world, you really want to be able to turn your pockets inside out and say, “Look, nothing there!”
The Collection Information Statement is the single source of information that the IRS uses to determine your Reasonable Collection Potential (RCP). In other words, the Form 433 is how you demonstrate what you can actually pay, or not pay, as the case may be. Just as a good CPA or tax preparer will ask you questions to find tax deductions you may not have thought of, any tax resolution professional worth their salt will be asking you for every little bit of information they can in order to maximize your allowable expenses and determine whether certain income and assets are either exempt or actually materially belong to you.
I think that if you tackle the IRS financial statement from the perspective of a loan application, it suddenly makes the process much easier to address. It will also help you understand why somebody like me is asking for such deeply personal financial information once you hire us to help resolve your IRS issues.
Until next time,
Jassen Bowman