Here we go over Income Averaging for Offer In Compromise. What it is and using it to your advantage. This subject seems to get missed in a lot of consultations where people are talking to tax relief salespeople. They don’t seem to cover this subject. This issue comes up quite often in Offers In Compromises for self-employed persons.
Check out our video presentation below on IRS OIC Income Averaging, or keep reading on for the written version:
Factors To Consider for Income Averaging in IRS Offer In Compromise
The IRS will consider the following factors when averaging your income in an Offer In Compromise: Varying expenses, varying income, seasonal unemployment, underemployment, long term unemployment, poor health, nearing retirement age, and bankruptcy.
We’ll go through each factor in more detail below.
Varying Expenses – Upcoming child, move, etc.
If necessary expenses are going to change in the future, the agent should calculate those in your ability to pay. So if they know you are going to move they should adjust numbers to those move numbers and if they are higher that’s gonna work to your advantage.
Varying Income – Common for Self Employment
This is very common for self-employed people. The common thing to do is go over average earning over the three prior years. If not using three years, there should be a good reason. COVID for example, maybe it decimated business for some people. Now they might be able to get around some of that prior three-year averaging. But if it looks that after COVID things are gonna go right back to normal then there is a good chance that the agent is gonna go with the prior three years.
Seasonal Unemployment: Yearly average
When you are consistently laid off and re-employed each year. They might use your prior year’s income or income averaging to come up with an average monthly income. So, people that are seasonal construction workers, some oil field workers that are seasonal, they are gonna use the yearly average unless it looks like it’s not gonna happen again and this was really the last time you are working there.
Underemployed: Anticipated income might get used
You work less during some periods of the year or you currently work less but are expected to work more in the future. Example: A teacher working less in the summer while not receiving any payments from their main during-the-year teaching job. If there’s an apparent chance for employment, the examiner will use what you would make at full employment. They consider special circumstances and are really looking for regularity to attribute the higher regular income to you. So they want to go with what’s regular. Not with what’s just right now, and if it ends up every year you are being underemployed they will come up with a yearly average for that.
Long Term Unemployed: Free ticket to OIC
Sometimes that’s a free ticket for Offer In Compromise. If there is a verified expectation the taxpayer will be securing employment then the use of anticipated future income may be appropriate. Use anticipated future income in situations where future employment is uncertain. That’s taken directly from the internal revenue manual. That’s the easiest way to explain it.
Other than that…. Got no assets? Easy Offer In Compromise! There are also some ways to get around some certain assets but we are not covering that in this guide.
Long Term Underemployed: Income treated as is
No future opportunities? Then the examiner will use the current numbers, as is. If you otherwise meet OIC requirements due to not enough income and low assets, you should have a simple case and acceptance. A lot of people that are underemployed when it’s just regular – it’s easy.
Poor Health: Reducing the future
If you are in poor health and not working much longer, that should be taken into consideration. The numbers will be adjusted to reflect the likely decrease in the future. If it looks like you are going to die in the next couple of years, or it looks like you will be debilitated and not working or you will be receiving disability or something like that, they are gonna take that and adjust the numbers accordingly.
Retirement Soon: Adjusted to change
If you are retiring soon then the IRS will adjust down future income. Another thing with OIC to consider you might not wanna take your social security yet because you might not qualify. So factor that in. If you are not sure or it’s too confusing, give us a call.
Overtime: Is it regular or temporary?
IRS uses base pay if it’s temporary, if it’s ongoing and regular they calculate the overtime into your regular monthly income. You are not forced legally in any way to work overtime. If you stopped working overtime and decided that you don’t wanna do that anymore then your numbers will be based on what have they have become. They are not gonna hold you to a lifetime of overtime but if you keep working it and they are reviewing an offer and it still shows overtime then they will use the overtime numbers. So in some cases, you will find that overtime amount the available income. So theoretically you are just working to pay the IRS and it’s up to you if you want to continue to do that or not.
Bankruptcy: Value of future income adjusted
The IRS might reduce the value of your future income, but they don’t discount it more than they would get out of payments from the bankruptcy if any. So chapter 13s are the most common types when you are gonna be getting a payment submitted and paying it of over five years period. If you have a lot of other debts, plus old tax debts, bankruptcy might be better. A lot of people won’t tell you that because bankruptcy is an easer procedure and often cheaper than doing tax relief but it will just fix a lot of things for you when you have a lot of debt. Sometimes you need OIC and bankruptcy when you have newer tax debts. They have to be on record for some time, I believe it’s 2 years. Ask your bankruptcy attorney to say: “Are these dischargeable or not? ”
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