In an Offer in Compromise (OIC), how does the IRS calculate my income and my expenses?
This is one of the most common questions that we receive from our clients when we are preparing their offer. Some clients worry that the IRS will take too much, leaving them without the ability to pay for basic expenses—such as food or housing. We have found that by carefully constructing the offer and by taking advantage of the programs the IRS provides, we can protect a portion of our client’s future income and alleviate these fears.
Then, how does the IRS calculate my income?
The IRS measures your monthly income. Whatever you make in a month from your job or income producing assets or interests is what you should report to the IRS. For taxpayers with a fluctuating monthly income, the IRS will look three years back and average the monthly income over that period. And for taxpayers who are close to retirement, the taxpayer’s income may be adjusted down to reflect the change in income after retirement.
Can my future income be offset by expenses?
It can be, but this is the most challenging part of filing an OIC. It is really worthwhile to contact a tax attorney to help get you through this process.
The IRS has a program that permits taxpayers to reduce his or her total monthly income by necessary expenses such as the cost of housing, transportation, and food. While this sounds promising, the IRS has generic expense schedules that they use to determine what your necessary expenses are, and it often undervalues your true monthly expenses.
Taking advantage of this IRS program is a good first step in protecting your future income, but in order to get the best result you will need convince the IRS to allow expenses in excess of their scheduled amounts. While this is not always possible, it is always a difficult process.