Completing Form 433-B for an Offer in Compromise (OIC)

An Offer in Compromise (OIC) is a program allowing certain businesses to resolve their federal tax liability with the Internal Revenue Service (IRS) for a lower amount than what they originally owed. A component of the OIC application for businesses is Form 433-B, the Collection Information Statement for Businesses. This form provides the IRS with a financial snapshot of the business, which the agency uses to determine its ability to pay its tax debt. This form is specifically for business entities like corporations and partnerships; sole proprietorships must use a different form.

Required Information for Form 433-B

Before beginning to fill out Form 433-B, gather extensive financial documentation to ensure all sections can be completed accurately.

General Business and Personnel Details

You will need to provide fundamental information about the business entity. This includes the legal name, Employer Identification Number (EIN), addresses, and a description of the business operations. Be prepared to list the date the business was established, the type of entity, and the total number of employees. The form also requires details on all significant individuals, such as partners or officers, including their names, addresses, Social Security numbers, and percentage of ownership.

Banking and Accounts Receivable

Comprehensive banking information is necessary. You must gather complete bank statements for the most recent three to six months for every business bank account. You will also need to report the current balance in each account. A detailed report of accounts and notes receivable is also required, listing all customers who owe the business money, how much they owe, and how long the debts have been outstanding.

Business Assets and Liabilities

A complete inventory of all business assets must be compiled. For real estate, this includes property deeds and recent appraisals. For business vehicles, you will need titles and reliable valuations. Alongside assets, you must document all liabilities by gathering the most recent statements from lenders for any loans, mortgages, or lines of credit that show the outstanding loan balances and monthly payments.

Income and Expense Verification

To verify the business’s cash flow, you will need to prepare detailed income and expense documentation. This involves providing profit and loss statements for the last six to twelve months. Additionally, you should have payroll records detailing gross monthly payroll and the frequency of federal tax deposits.

Completing Form 433-B

Once all financial documents have been gathered, you can proceed with filling out Form 433-B (OIC). It is important to use the specific “OIC” version of the form, as it contains sections for calculating the offer amount that are not on the standard Form 433-B.

Section 1: Business Information

This initial section requires the general business details you have gathered. You will enter the business name, EIN, addresses, and contact information. It also asks for specifics about the business structure and information about key personnel, including their ownership percentages and salaries.

Section 2: Business Asset Information

In this part of the form, you will disclose all business assets. This includes cash on hand, the current balance of all bank accounts, and the value of investments. You must list accounts receivable, and for physical assets like real estate and equipment, you will report the fair market value and subtract any outstanding loan balances to show the equity.

Section 3 & 4: Business Income and Expenses

These sections require a detailed breakdown of the business’s monthly financial performance. Using your profit and loss statements, you will report the average gross monthly income from all sources. Following that, you will list the average monthly expenses in the categories provided, such as payroll, rent, and supplies. The IRS does not permit deductions for non-cash expenses like depreciation. The difference between total monthly income and total allowable monthly expenses results in the net monthly income.

Calculating Your Offer Amount

The information on Form 433-B is used to determine the business’s Reasonable Collection Potential (RCP). The RCP is the minimum amount the IRS will consider for an OIC, representing the total value the agency believes it could collect from assets and future income. An offer submitted for less than the RCP is unlikely to be accepted.

The RCP calculation has two components. The first is the Net Realizable Equity (NRE) in the business’s assets. To find this value, take the fair market value of each asset and subtract any outstanding loans or liens secured by it. The IRS reduces the fair market value of most assets by 20% to account for a quick sale, but this reduction does not apply to cash.

The second component is the business’s future income potential. The IRS calculates this by taking the net monthly income from Form 433-B and multiplying it by a factor based on the offer’s payment terms. For a lump-sum payment made within five months of acceptance, the net monthly income is multiplied by 12. For payments made over 6 to 24 months, the net monthly income is multiplied by 24.

The minimum offer amount is the sum of these two components. The formula is: Net Realizable Equity in Assets + Future Income Potential = Minimum Offer Amount.

Submitting the OIC Package

After completing Form 433-B and calculating the offer amount, the final step is to assemble and submit the entire OIC package. Incomplete submissions will be returned without consideration. The package must include:

• The completed Form 433-B (OIC) and all supporting financial documentation.
• Form 656, Offer in Compromise, which is the official application stating the offer amount.
• A non-refundable application fee of $205, unless you qualify for a low-income exemption.
• An initial, non-refundable payment toward the offer, with the amount depending on the payment terms selected.

The complete OIC package must be mailed to the correct IRS processing center, determined by the state where the business operates. The two centers are in Holtsville, New York (P.O. Box 9011, Holtsville, NY 11742) and Memphis, Tennessee (P.O. Box 30834, Memphis, TN 38130). You must consult the latest Form 656-B booklet to verify which address to use.

Once the package is mailed, you should receive a letter from the IRS confirming receipt. The case will then be assigned to an Offer Examiner for a detailed review, a process that can take several months. The examiner may contact you for additional information during their evaluation.