The Bank Credit Analysis Handbook:.rar
Anna Pybus
Program Goals: Policy Statement P-5-100 explains the objective of the OIC as a collection tool. This Internal Revenue Manual (IRM) section provides the fundamental knowledge and procedural guidance for offer examiners and offer specialists engaged in the investigation of offers. The procedures in this IRM include guidance so employees will be able to complete offer investigations and initiate taxpayer contact, when appropriate. By following the procedures in this IRM, employees will be able to conduct an appropriate financial analysis to support an offer in compromise determination.
Certain income is not reported via Form 1099 unless a specific dollar amount or number of transactions are met. The OE/OS must question the taxpayer when the potential exists they receive income from the gig economy (also called sharing or access economy in which on demand work/services are provided). In these instances, question the taxpayer about additional income sources. These questions are necessary in certain situations such as when the CIS includes expenses which exceed income by a considerable amount or taxpayer does not have a bank account and uses digital payment network e.g. Paypal, Zelle, Venmo, etc.
When a taxpayer owns or indications are they may own assets outside the country the OE/OS must include those assets in the calculation of RCP. Assets may include, real property, bank accounts, other personal property, or income sources. Information is available in IRM 5.21.3, Collection Tools for International Cases to assist in locating and valuing assets outside the country. In some instances, it may be appropriate to contact an International or Abusive Tax Avoidance Transaction group for assistance in valuing or locating these assets.
A critical part of the financial analysis is to determine what degree of control the taxpayer has over assets and income in the possession of others. This is especially true when the offer will be funded by a third party.
Review checking account statements over a reasonable period of time, generally three months for wage earners and six months for taxpayers who are non wage earners. Look for any unusual activity, such as deposits in excess of reported income, large withdrawals, transfers to other accounts, or checks for expenses not reflected on the CIS. The review may also determine mortgage or car payments listed on the CIS are not reflected on the bank statement. Discuss any inconsistencies with the taxpayer.
When investigating the RCP for an offer that includes business assets, an analysis is necessary to determine if certain assets are essential for the production of income. When it has been identified that an asset or a portion of an asset is necessary for the production of income, it is appropriate to adjust the income or expense calculation for that taxpayer to account for the loss of income stream if the asset was either liquidated or used as collateral to secure a loan to fund the offer.
Evaluation of a business as a going concern is sometimes necessary when determining RCP of an operating business owned individually or by a corporation, partnership, or LLC. This analysis recognizes that a business may be worth more than the sum of its parts, when sold as a going concern.
Generally, the difference between what an ongoing business would realize if sold on the open market as a going concern and the traditional RCP analysis is attributable to the value of these intangibles.
(3) Substantial amount withdrawn from bank accounts. Taxpayer provided supporting documentation that funds were used to pay for medical or other necessary living expenses. This amount will not be included in the RCP calculation
Future income is defined as an estimate of the taxpayer's ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future. See IRM 5.8.5.25, Calculation of Future Income, table for calculation.
Exercise good judgment when determining future income. The history must be clearly documented and support the known facts and circumstances of the case and include analysis of the supporting documents. Each case needs to be evaluated on its own particular set of facts and circumstances. The history must clearly explain the reasoning behind our actions.
When the taxpayer can provide documentation that income is not mingled (as in the case of roommates who share housing) and responsibility for household expenses are divided equitably between cohabitants (as documented by rental agreements, bank statement analysis, etc.), the total allowable expenses should not exceed the total allowable housing standard for the taxpayer, plus any allowable dependents.
Future income is defined as an estimate of the taxpayer's ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future. The number of months used depends on the payment terms of the offer.
Reported income must be verified by the OE/OS. This financial review should include bank statements and may include income tax returns, or other financial documents available to the taxpayer. In circumstances in which entity information is being reviewed in conjunction with an offer submitted by an individual, a determination should be made whether the entity is retaining earnings which should be distributed to the taxpayer which would increase FIV or RCP of the individual submitting the offer.
As with any closely held entity, the OE/OS should determine if income or assets of the individual and LLC are being commingled. If necessary, bank statements or other financial information may be requested from owner/member to determine appropriate RCP.
Credit cards are one of the most ubiquitous consumer financial products in the United States, with more than 75 percent of households owning at least one general purpose credit card in 2019.1 According to the G.19 Consumer Credit Statistical release, revolving consumer credit, which mainly consists of credit cards and related plans, stood at over one trillion dollars at the end of 2021. Over the past 40 years, the profitability of the credit card industry has received much attention from both academic research and regulatory reports.2 Most of these analyses of credit cards rely on bank-level regulatory data, which allow only the calculation of bank-level profitability, rather than the profitability of just the credit card portfolio.
In this note, we contribute to the analysis of credit card profitability by examining the drivers of profitability. We overcome issues that plagued many of the past analyses by using detailed data on the credit card portfolios of some of the largest credit card lenders. Our analysis focuses on the business model of credit cards from the perspective of both issuers and borrowers. Specifically, we break down profitability based on the two main functions of credit cards: a transaction function and a credit function. The transaction, or payment, function allows the user to purchase goods without using cash, whereas the credit function allows the user to borrow by carrying balances on their credit cards, resulting in interest charges accruing on the account.3
This distinction is important because the main sources of revenue differ for the two functions. The main source of revenue for the transaction function is interchange, which is the network fee paid by the acquiring bank (the merchant's bank) to the issuing bank (the cardholder's bank).4 For the credit function, interest income is the main source of revenue. The last source of credit card revenue is usage fees, including late fees, over-limit fees, foreign exchange fees, and so on. These fees are not directly related to either the credit or transaction functions; instead, these fees pertain to certain aspects of credit card usage, and only some credit card accounts incur these fees.
We begin with an overview of credit card profitability, using two datasets from the Capital Assessments and Stress Testing Report (FR Y-14M) for the time period of January 2014 to December 2021. These data provide detailed information on the credit card operations of stress-tested banking organizations.
The first is a portfolio-level dataset that reports, for each bank, granular monthly information on the balances, revenues, and expenses of the credit card portfolio, including interest income, interchange income, fee income by type of fee, interest expenses, noninterest expenses, and provisions for loan losses. The second is an account-level dataset that provides information on how the account is used, including balances, total purchases made during the month, finance charges, and fees accrued.6 We use a constant sample of 13 banks during our sample period. As the Y-14M data include all of the largest credit card issuers, our sample covers about 80 percent of credit card balances reported in the regulatory Reports of Condition and Income (Call Reports).
Figure 1 presents the quarterly return on credit card assets (in red) using the portfolio dataset. Before the start of the COVID-19 pandemic in March 2020, the return on assets (ROA) was fairly stable, decreasing only slightly from 2014 to 2019. As we will discuss, the sharp decline in early 2020 and subsequent rebound are due to banks' provisioning for credit card losses that did not materialize and subsequent drastic reversals of this provisioning.7 By the end of 2021, the return on credit cards assets reverted closer towards long-term trends.
Note: Return on assets for Y-14 is calculated as the sum of interest income and noninterest income minus interest expense, noninterest expense and loan loss provisions, divided by average credit card balances. Y-14 reflects a constant sample of banks. Return on assets for Call Report is calculated as quarterly income divided by average quarterly assets. Prior to 2010, some credit card banks held large portfolios of credit-card-backed securities off-balance-sheet. Therefore, average quarterly assets prior to 2010 include on-balance sheet credit card securitizations.
aa06259810