Future Income in an Offer in Compromise: The 12-Month and 24-Month Multipliers

An offer in compromise has to account for two things: what you own and what you can pay from income. The income piece is called future income, and it is often the swing factor between an offer that works and one that does not. The formula is simple. The rules around it are where the money is.

The definition

IRM 5.8.5.20 defines future income as an estimate of your ability to pay, based on gross income less necessary living expenses, for a specific number of months into the future. Generally, current income is used. IRM 5.8.5.25 says the amount is the projected gross monthly income, less allowable expenses, multiplied by the number of months that applies to the offer terms.

Which multiplier

The statute defines a lump sum offer the same way: IRC 7122(c)(1)(A)(ii) calls any offer of payments in five or fewer installments a lump sum offer, which requires 20 percent with the submission.

Example A: the basic choice

A taxpayer earns $7,400 a month gross. Allowable expenses come to $6,550. Every year in the offer has more than 24 months left on its collection statute.

If the taxpayer can raise the lump sum, the offer is $10,200 smaller. Many people borrow from family or sell an asset to make that happen. A sale used to fund the offer is valued at the actual sale price under IRM 5.8.5.4.1; see quick sale value and NRE.

Example B: the collection statute cuts it short

IRM 5.8.5.25 says that for both lump sum and periodic offers, when there are fewer than 12 or 24 months remaining on the statutory period for collection on all tax periods, use the number of months remaining. Its own example: an offer for one year with 10 months left on the CSED uses 10 months, not 12 or 24.

There is a catch the IRM spells out. If the offer covers several years and only some have short CSEDs, the shortest one does not control. In the IRM example, an offer for three years with 3, 40, and 111 months left still used 12 or 24 months, because the taxpayer could not pay in full within the 111 months remaining on the latest year.

Example C: small balances limit the months

Exhibit 5.8.5-1 in the IRM shows a subtler limit for periodic offers. The IRS counts how many monthly installments each year could actually absorb before its CSED expires or its balance is paid, and adds those up.

Year 1 is the big balance, but it expires in nine months. Years 2 and 3 have long statutes but tiny balances. The IRS cannot collect 24 months of payments from that mix, so it does not count them.

When the IRS uses a different income figure

IRM 5.8.5.20 lists situations where current income is not the right number:

• Temporarily unemployed or underemployed with a clear path back: use expected income once fully employed.
• Irregular or fluctuating income, other than wage earners: average the prior three years.
• Long-term unemployed or underemployed: use current income, without averaging.
• Poor health: reduce the number of months to how long the taxpayer is expected to keep working.
• Retirement imminent and substantiated: use current income until retirement, then expected retirement income.

How expenses feed the number

Allowable expenses come from the IRS Collection Financial Standards for food, clothing, housing, transportation, and health care, plus other necessary expenses under IRM 5.8.5.22. IRC 7122(d)(2) requires the IRS to publish those national and local allowances and to depart from them when using them would leave a taxpayer without adequate means for basic living expenses. Every $100 of monthly expense allowed or disallowed moves a lump sum offer by $1,200 and a periodic offer by $2,400.

Putting it in the formula

Future income plus net realizable equity is reasonable collection potential. The complete computation, including the 20 percent payment on lump sum offers, is in the RCP formula guide. Remember that a pending offer suspends the CSED, which can work against you if the offer fails; see offer tolling. For the overall process, see Offer in Compromise Explained.

Worked example: retirement inside the window

IRM 5.8.5.20 lets the IRS adjust future income when a change is coming and can be substantiated. Say a taxpayer has monthly disposable income of $1,200 today and documents a retirement date eight months away, after which monthly disposable income will be $300.

For a lump sum offer, the 12 months are split: 8 months at $1,200 is $9,600, plus 4 months at $300 is $1,200, for $10,800 of future income. For a periodic offer, the 24 months are split: 8 months at $1,200 is $9,600, plus 16 months at $300 is $4,800, for $14,400. Without the retirement adjustment, those figures would have been $14,400 and $28,800. Documentation of the retirement date was worth $3,600 on a lump sum offer and $14,400 on a periodic one.

Worked example: three-year averaging

For taxpayers with irregular or fluctuating income, other than wage earners, IRM 5.8.5.20 says to average earnings over the three prior years. Say a self-employed consultant earned $90,000, $40,000, and $65,000 in the last three years. The average is $65,000 a year, or about $5,416.67 a month, before expenses. If allowable expenses are $4,900 a month, monthly disposable income is about $516.67, and future income is about $6,200 for a lump sum offer or $12,400 for a periodic offer.

Using only the most recent year, $65,000 happens to match here. Using the best year, $90,000, would have produced about $7,500 a month of income and roughly $2,600 a month of disposable income, more than five times as much. That is why the averaging rule matters, and why wage earners, who are generally measured on current income, are treated differently.

Small changes, big multipliers

Every $100 a month in disposable income moves a lump sum offer by $1,200 and a periodic offer by $2,400. A $250 car payment that ends in month three, a child aging out of daycare, or a mortgage refinance can all change the figure. Under IRM 5.8.5.20, when income or necessary expenses will increase or decrease during the period, the IRS adjusts the amount or the number of payments to what is expected. Disclose the changes that help you, and expect the IRS to find the ones that do not.

Future income and the CSED together

The CSED limit and the multiplier interact. A taxpayer with $850 of monthly disposable income and 18 months left on every year in the offer gets 12 months for a lump sum offer, because 12 is less than 18, but only 18 months for a periodic offer, because 18 is less than 24. Future income is $10,200 for the lump sum and $15,300 for the periodic offer. The closer the CSED, the smaller the gap between the two offer types, and the less the extra payment time costs.

One more practical point: the IRS uses its own expense figures where the Collection Financial Standards apply, not what you actually spend. If your real housing cost is above the local standard, the excess is generally not allowed unless you show why it is necessary, and the disallowed amount flows into disposable income at 12 or 24 times its monthly value.

The bottom line

Future income is monthly disposable income times 12 for a lump sum offer or 24 for a periodic one, cut down to the months the IRS can actually collect before the statute runs. That last limit is where offers get cheaper, and it only shows up if someone computed the CSEDs first.