Whose Household is It?

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The IRS just issued two FAQs providing information regarding offers in compromise (OIC).  One of the FAQs is unremarkable while I find the other FAQ inadequate for reasons that I will explain further below. 

Every year in the seminar that accompanies the clinic, I devote one class to offers in compromise because so many of the clients coming to the clinic need an offer in compromise or, at least, need us to analyze whether they qualify for an OIC.  I tweak the fact pattern a little bit every year but I still use the fact pattern developed by Les Book when he ran the tax clinic at Villanova before I took his place.  The first issue presented by the case involves the taxpayer’s household.  The students do not find the IRS’ instructions clear on this point.  This year, as is typical, about half of the students found that taxpayer’s household included persons he was living with and half found that the taxpayer had a household of one.  Why do they have trouble with this basic issue?


The fact pattern has Steve Freshstart living with his girlfriend.  Steve moved in two months ago.  Steve and the girlfriend maintain separate bank accounts.  Steve pays has $900 a month to cover his share of the rent and utilities on the apartment.  Steve buys his own food.  Steve uses his money for Steve while his girlfriend, Cindy, uses her money for herself and her two children.  Whether Steve must include his girlfriend’s finances in his offer in compromise matters not only to the computation of his allowable living expenses and ultimately his reasonable collection potential but also to his relationship with his girlfriend.

Imagine you are Cindy and your boyfriend who moved in with you two months ago now needs you to bare your financial soul to the IRS because you are living together even though your financial living arrangement seems very much like one of roommates rather than soulmates.  If Steve must ask Cindy to provide all of her financial information to the IRS just because she shares an apartment with him seems unnecessarily intrusive yet the IRS instructions lead half of my students to that conclusion.  The latest FAQs do nothing to alleviate the confusion. 

Here are the new FAQs:

Q. Does Form 8821, Tax Information Authorization, allow taxpayers to designate a third party to represent them before the IRS on an OIC?

A. No. Form 8821 does not authorize a third party to speak on the taxpayer’s behalf or to otherwise advocate the taxpayer’s position before the IRS. Form 8821 only authorizes the designated third party (appointee) to inspect and/or receive a taxpayer’s confidential information for the type of tax and the years or periods the taxpayer lists on their Form 8821. Therefore, a taxpayer’s appointee cannot represent the taxpayer in a collection matter, such as an OIC before the IRS. Taxpayers should use Form 2848, Power of Attorney and Declaration of Representative, to authorize an individual to represent them before the IRS.

Q. Does a taxpayer need to include his or her spouse’s income on the taxpayer’s Form 433-A (OIC), If the taxpayer’s spouse doesn’t owe taxes?

A. Yes. A taxpayer needs to provide information about the taxpayer’s entire household’s average gross monthly income and actual expenses when making an OIC. The taxpayer’s entire household includes all individuals, in addition to the taxpayer, who contribute money to pay expenses relating to the household, such as rent, utilities, insurance, groceries, etc. The IRS needs this information to accurately evaluate the taxpayer’s OIC. The information may also be used to determine the taxpayer’s share of the total household income and expenses and what the taxpayer can afford to pay the IRS.

 The first FAQ provides a logical piece of information, viz., that a person who does not represent the taxpayer cannot represent them in an OIC.  The Form 8821 permits the holder to receive information but has nothing to do with representation of a taxpayer before the IRS.  While I do not know how necessary it was to issue this FAQ because I have no idea how many people try to represent a taxpayer based on a form allowing them to merely obtain information, I have no problem with this FAQ.

The second FAQ provides very little information that will assist my students in deciding what to do with Cindy and her children.  In the simulated problem they have, it’s really just a question of math whether Cindy’s finances get added to Steve’s since the students do not need to interface with Cindy.  In real life the questions become much stickier.  On several occasions the clinic has encountered significant others quite reluctant to bare their finances to the IRS and quite put out with the clinic for suggesting that they must do so or their boyfriend/girlfriend will not reach the promised land of an OIC.

My view is that the IRS does not need or really want Cindy’s financial information.  At this point in the relationship she is financially a roommate rather than someone whose finances have intertwined with the taxpayer needing collection relief.  It is no more appropriate to ask her for financial information than it is to ask college roommates to provide financial information should one of the other roommates seek an offer in compromise.  Yes, she and Steve live in the same household and share the same bed but they do not share finances and that is the critical factor in requiring her financial information.

These questions can be close.  Deciding who constitute a household requires more than simply sharing space.  The FAQ would help if it made that clear and if it was written so that Harvard and Villanova law students could figure out who belongs to a household for this purpose.  If these law students cannot make that determination, imagine how hard it is for pro se taxpayers to try to work their way through this problem. 


  1. Howard Kaplan says

    I totally agree and in fact have had circumstances where it gets even more “complicated”. I have had revenue officers ask for Cindy’s information because they want to “make sure” that Steve is paying his “fair share” of the expenses. Otherwise it is their belief that Cindy is somehow supporting Steve and therefore her financial situation becomes relevant in what Steve can pay.

  2. The Internal Revenue Manual provides a taxpayer can be treated as a household of one when the non-liable spouse does not provide financial information. (IRM This approach sometimes works when the non-liable spouse or non-liable “significant other” does not want to participate in the OIC.

  3. I haven’t researched whether the Tax Court has weighed in on this issue previously, but it would be interesting to see whether the Court agrees with me that it is an abuse of discretion for the IRS to deny an OIC on the grounds that an unrelated roommate refuses to provide financial information.

  4. Kenneth H. Ryesky says

    The taxation angle very frequently triggers the Law of Unintended Consequences in just about everything. The IRS seems to have done so with the Grashof-Dixon “Household” model (Dixon was heavily touting the concept even before his 1980 landmark article was published, when I took his Marketing class as an undergrad).

    [John F. Grashof & Donald F. Dixon, The Household: The “Proper” Model for Research into Purchasing and Consumption Behavior, 7 ADVANCES IN CONSUMER RESEARCH 486 (1980). http://www.acrwebsite.org/volumes/9721/volumes/v07/NA-07 ].

    The Supreme Court put the tax collector into the bedroom with the Windsor case [United States v. Windsor, 570 U.S. 744, 133 S. Ct. 2675; 186 L. Ed. 2d 808 (2013)
    https://www.leagle.com/decision/insco20130626j49 ].

    Is, then, the IRS’s ambiguous policy behind its intrusion into the personal affairs of an unrelated roommate surprising or unexpected?

  5. What bugs me is that the answer IRS gives is not in response to the question posed.

    Yes, a non-liable spouse must provide financial information. The portion of the answer concerning the entire household is not responsive to the question and should be reworded and rewritten by the Service. I’ll submit information to two LTAs I have worked with recently in hopes they can convince the Service to make the change.

  6. What bugs me is that the answer IRS gives is not in response to the question posed.

    Yes, a non-liable spouse must provide financial information. The portion of the answer concerning the entire household is not responsive to the question and should be reworded and rewritten by the Service. I’ll submit information to two LTAs I have worked with recently in hopes they can convince the Service to make the change. It should be easy as the FAQ is erroneous.

    The IRM cite by Joe Cole IRM is relatively new and is a change from the previous IRS position that an Offer could be rejected on grounds of not providing the information and the possibility that having a roommate of some means could cause an Offer to be rejected.

    Bottom line…the IRM cite is correct and the answer to the FAQ is inconsistent with current IRS policy. Excellent discussion.

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