We have previously looked at determining future income for purposes of an offer in compromise for the wage earner and self-employed individuals. We will now analyze future income for businesses. One of the twin pillars of an offer in compromise is determining the taxpayer’s future income. The IRS looks to future income to determine the taxpayer’s reasonable collection potential, which is the taxpayer’s ability, or inability, to pay the tax due and owing. If the taxpayer is unable to pay the tax, the IRS may be willing to compromise the tax debt.
For purposes of the offer in compromise, a C-corporation, S-corporation, LLC taxed as a corporation, a multi-member LLC and partnership must submit IRS Form 433-B Collection Information Statement for Business. As set forth on the Form, the taxpayer enters an average gross monthly income from a Profit and Loss Statement or uses the spaces within the form itself to report gross income. All forms of business income must be accounted for including sales of goods and services, dividends, interest, rents, royalties, and capital gain.[1]
The income is then reduced by business expenses. “The IRC permits a taxpayer entity to reduce its income by deducting expenses paid to earn that income.”[2] Non-cash expenses such as depreciation must be removed from the expense allowance.[3] The following are also not permitted expenses in determining future business income for an offer in compromise: bad debt, depletion, inflated corporate salaries to reduce net gain, interest on corporate assets used by shareholders or officers for personal gain, and net operating loss.[4]
The taxpayer should be prepared to show that income is fluctuating and should be averaged over a greater period of time in order to accurately reflect income. Please consult with a tax professional to ensure that calculations are correctly made.
Jared M. Le Fevre is a Partner in the Tax, Trusts and Estates Practice Group of Crowley Fleck PLLP. Mr. Le Fevre represents taxpayers before the IRS, IRS Independent Office of Appeals, Tax Court, Federal District Court and state tax agencies throughout Montana, Wyoming, North Dakota, Idaho, and Utah. Mr. Le Fevre is involved in federal and state and local tax audits, appeals, and tax resolution throughout these western states. Mr. Le Fevre also advises clients on the tax effects of business and real estate transactions.
[1] IRM 5.5.1.19.
[2] IRM 5.15.1.18(1).
[3] IRM 5.15.1.18(2).
[4] IRM 5.15.1.19.