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| A quick review of the PVIA Discount Number One of the most critical numbers in an offer in compromise is the PVIA. This stands for the Present Value of the Installment Agreement. The IRS reviews an Offer in Compromise and calculates the Reasonable Collection Potential. The minimum amount the IRS will accept in an Offer in Compromise is the Reasonable Collection Potential. The amount of, the Reasonable Collection Potential is the sum of the Quick Sale Value of all of the Taxpayers Assets plus the Present Value of the Installment Agreement. Another way to put this is, the IRS will accept, in a compromise situation, an amount of money that represents all of the taxpayers equity in assets plus an amount of his future income (PVIA). IRS calculates the PVIA by subtracting the taxpayer’s allowable expenses on page 6 of the Form 433A from the income shown on the Form 433A. The difference between the taxpayer,s income and the expenses allowed by the IRS is the Installment Amount. The Installment Amount is the minimum monthly amount the IRS will accept in an installment agreement. In a cash offer (one payable within 90 days of the acceptance by the IRS) the PVIA is generally calculated by multiplying the Installment Amount by a multiplier of 48. The multiplier of 48 is a rough approximation of the Present Value of the Installment Amount discounted back to present value at the Applicable Federal Midterm Interest Rate. Here is an illustration. Assume the taxpayer has monthly gross income of $3,500 and allowable expenses of only $2,500. In this case the Installment Amount is $1,000. ($3,500 in monthly income minus $2,500). If the Installment Amount is $1,000 then the PVIA for a cash offer is $48,000 under these facts. The Installment Amount ($1,000) times the multiplier (48) equals $48,000. Generally when we plan an offer we focus our efforts on reducing the Installment Amount by trying to increase the allowable expenses or decrease the monthly income. An example would be by having the taxpayer quit working overtime for the purpose of reducing his monthly income. Let’s say it reduces his monthly income by $700. Then the Installment Amount would by only $300 because the taxpayer has only $2,800 in monthly income. (previous monthly income $3,500 less the $700 reduction for lack of overtime pay equals $2,800.) Under this new set of facts, the taxpayer’s Installment Amount is only $300. (Monthly Income of $2,800 minus allowable expenses of $2,500 equals an Installment Amount of only $300.) Now the PVIA is only $14,400. ($300 Installment Amount times 48). Thus the tax payer reduces the Reasonable Collection Potential by $33,600. So by ceasing to work overtime the taxpayer has reduced the minimum amount the IRS will accept by $33,600. This dramatic reduction in the minimum acceptable offer is why it is important to focus on the PVIA. Like I said earlier, we have usually focused on reducing the Installment Amount to reduce the PVIA. However, I have now seen a new development.
Last week one of my readers faxed me a copy of the AET (Asset Equity Table) and the IET (Income Expense Table) the IRS had sent him when working up his offer. One of the first things I noticed was that the multiplier the Offer Examiner used was only 26 and not 48. Now this is a very big reduction. What I found out was that the taxpayer was 63 years old and that the offer examiner determined that age 65 is the normal retirement age. So the Offer Examiner reduced the 48 multiplier by the number of months until the taxpayer turned age 65. Since it was 22 months until the taxpayer turned 65 the Offer Examiner reduced the multiplier from 48 by 22 months to 26. Using the facts from the example above where the taxpayer had an Installment Amount of $1,000 per month changing the multiplier from 48 to 26 will reduce the PVIA by $22,000 and save the taxpayer $22,000. ($48,000 minus $26,000). Not bad, huh! The take-away from this is that if you or your clients are approaching age 65 or some other normal retirement age (based on your job or occupation) you should argue for a reduction in the PVIA multiplier when dealing with an Offer Examiner or Offer Specialist. And if they don’t agree then take that argument to Appeals. This was a first to me and I promptly tried to apply this theory to a doctor I represent who is age 67. The Appeals Officer rejected the argument. So here is the dilemma. I know that an offer examiner has reduced the PVIA multiplier for a taxpayer based on age but I can’t get a different person who is an Offer Specialist to do the same for my client. I need your help. If you or your client has had some success or failure in this please consider sharing this information with me to help mount a court challenge to arbitrary application of this theory. My idea is to try to get a client in this posture to present an offer in the context of a CDP hearing and if the Appeals Officer rejects the reduction in the modifier because of the taxpayer’s age then take the case to Tax Court. The challenge in Tax Court will be the failure of the IRS to allow a reduction in the PVIA multiplier to one taxpayer because of his age and grant it to another taxpayer because of his age would be denial of due process and equal treatment . And that the denial of equal treatment to similar taxpayers is an abuse of discretion. So, if you or one of your clients finds himself in this position please give me a call or send me an email to discuss your findings. |