An offer in compromise to the IRS is founded on two financial pillars: (a) net realizable equity in the taxpayer’s assets and (b) the taxpayer’s future income that may be available to pay tax liability.
“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.”[1]
As a general rule, the IRS uses the taxpayer’s current income to determine future ability to pay outstanding tax liability.[2] The most straightforward way to demonstrate current income is by submission of payroll stubs. IRS Form 433-A (OIC), the form for submitting an offer in compromise to the IRS, requires that the taxpayer submit “Copies of the most recent pay stub, earnings statement, etc. from each employer.” However, the IRS may require three months of pay stubs.[3]
However, not all taxpayers have regular monthly checks from the same job that can be counted on to determine future income. Accordingly, circumstances exist to diverge from using income shown on recent payroll check stubs in computing an offer in compromise. Some of those circumstances where a different amount of future income may be used include situations where:
- Income will increase or decrease.
- Taxpayer is temporary underemployed or unemployed.
- Taxpayer is unemployed and not expected to return to previous occupation or earning level.
- Taxpayer is long-term unemployed.
- Taxpayer is long-term underemployed.
- Taxpayer has irregular employment or fluctuating income.
- Taxpayer is in poor health and ability to continue working is questionable.
- Taxpayer is close to retirement and has indicted he or she will be retiring.[4]
The IRS has rules for determining future income for each of these circumstances. Careful consideration must be given to calculating income, which may permit the taxpayer to advocate for lower amounts of countable income to be paid toward an offer in compromise, the result of which may be that the IRS would accept a lower amount to settle tax liability.
Additional income information is needed for self-employed individuals and businesses[5] and will be discussed in a future article.
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, 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.
[1] IRM 5.8.5.20(1).
[2] IRM 5.8.5.20(2).
[3] IRM 5.8.5.3.1.3(2).
[4] IRM 5.8.5.20(4).
[5] IRM 5.8.5.3.1.3(2).