A previous article examined the expenses the IRS allows in determining an offer in compromise based upon doubt as to collectability of the tax. The taxpayer computes his or her personal and business expenses as of the date of the offer in compromise. But what happens if the taxpayer’s expenses change while the offer is being considered by the IRS or the expenses are scheduled to change after a period of time?
This list contains expenses that may change after the offer in compromise is filed and explains how the IRS deals with these changes.
Minor children. IRS allowable personal and family expenses are calculated based upon the number of qualifying people in the household. Generally, the amount of family members allowed for offer in compromise expense calculation is the same amount as claimed dependants on the most recent tax return.[1]
Retired debt. Retired debt is an expected change in necessary or allowable expenses. The necessary/allowable expenses may decrease, which would change the taxpayer’s ability to pay.[2] The Internal Revenue Manual includes an example of retired debt to be added back into the ability to pay analysis: if child support is paid off during the collection statute expiration date. “It is expected that these retired payments would increase the taxpayer’s ability to pay.”[3] However, per the Internal Revenue Manual, “retired debt should not be automatically included in the calculation of the RCP [reasonable collection potential]. Rather, the IRS should use judgment to determine whether inclusion of retired debt is appropriate.[4]
Vehicles. The internal Revenue Manuel permits the first $400 of a vehicle loan to not be included in the reasonable collection potential analysis even if the car loan will be paid off within the collection statute expiration date.[5]
Expenses incurred. If a taxpayer’s expenses increase following the submission of an offer in compromise but before the offer is approved or rejected by the IRS, and those increased expenses fit within the range of allowable expenses, it is my experience that the IRS will permit changed expenses if the expenses otherwise fit within IRS rules. For example, the IRS will allow further substantiation of the expenses or permit the expenses if the changed expense fits under IRS expense guidelines. However, I have not been able to locate specific IRS authority that discusses allowing changed expenses.
Taxpayers seeking an offer in compromise are encouraged to contact Jared Le Fevre to discuss how changing expenses may impact the offer in compromise.
Jared M. Le Fevre is a tax attorney and 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 5.15.1.10(1).
[2] IRM 5.8.5.19(1).
[3] Id.
[4] IRM 5.8.5.19(2)
[5] IRM 5.8.5.19(3)