Offer in Compromise: Profit and Loss Statement Considerations
- Jessica McCarthy
- 4 hours ago
- 5 min read
When submitting an Offer in Compromise (OIC) to the IRS, one of the most important components is the Profit and Loss Statement and the way living expenses are calculated. Understanding how the IRS evaluates expenses can make a significant difference in whether an offer is accepted or rejected.
At a high level, the IRS looks at expenses through three different lenses: actual expenses, Collection Financial Standards, and deviations above the standard. Each applies in different circumstances and knowing when and how to use them is key.
Actual Expenses vs. Collection Financial Standards
Actual expenses reflect what a taxpayer truly spends on basic, necessary living costs. These expenses are generally calculated using an average of the most recent three months and must be substantiated with bank statements, receipts, or other proof of payment.
By contrast, Collection Financial Standards are preset expense limits published by the IRS. These standards are based on household size and geographic location and are used to determine the maximum allowable expenses for categories such as food, housing, transportation, and medical costs. The IRS updates these figures periodically to reflect changes in national and regional averages.
In many cases, the IRS will rely on the Collection Financial Standards even if a taxpayer’s actual expenses are higher.
Deviations Above the Standard
In certain situations, taxpayers may qualify for deviations above the standard. These are allowed when a taxpayer can demonstrate that the Collection Financial Standards do not provide adequate means to cover basic and necessary living expenses. This authority comes from Internal Revenue Code § 7122(d)(2).
To obtain a deviation, taxpayers must provide documentation and a clear explanation showing why the standard amount is insufficient.
Common Expense Categories Explained
Food, Clothing, and Miscellaneous Expenses
These expenses are generally taken directly from the IRS Collection Financial Standards. For example, a family of four may be allowed a total monthly expense of $1,753 under the standard.
However, if a taxpayer can show that actual costs exceed the standard due to special circumstances, such as dietary restrictions caused by medical conditions or food allergies, the IRS may allow the full actual expense amount. Supporting documentation is essential in these cases.
Housing and Utilities
Housing and utility expenses are also based on IRS standards that vary by county and household size. For example, a family of four living in Bergen County may have a standard allowable housing expense of $4,500 per month.
The IRS may allow a higher amount if applying the standard would prevent the taxpayer from meeting basic living needs. A common example is when a taxpayer cannot restructure a mortgage, lacks sufficient equity to sell the home, and cannot afford the costs of selling, moving, and securing alternative housing within the standard limits.
To support a deviation, taxpayers should research and document:
Comparable rental costs
Estimated selling expenses
Moving costs
Special circumstances, such as physical disabilities or financial hardship resulting in negative monthly income, may also justify expenses above the standard when income is fully exhausted on dependent care and wellbeing.
Car Ownership Expenses
For car ownership, taxpayers are limited strictly to the national standard amount. The IRS does not allow deductions above this standard, regardless of actual payment amounts.
Car Operating Expenses
Car operating expenses are based on IRS standards as well. Currently, taxpayers may deduct $401 per household vehicle.
If a vehicle has 125,000 miles or more, the IRS allows an additional $200 per month, bringing the total allowable expense to $601. If a taxpayer can demonstrate that actual operating costs exceed the standard, the IRS may allow the higher amount.
Taxpayers should be careful not to double count expenses. If vehicle expenses are already deducted in calculating net business income, the IRS will not allow them again as personal expenses.
Public Transportation Costs
Public transportation expenses are derived from national IRS standards. Taxpayers with no vehicles may deduct the standard amount of $244 per month without substantiation.
If a taxpayer incurs both car operating and public transportation expenses, only the actual monthly expenses may be deducted.
Out-of-Pocket Medical Expenses
The IRS allows standard monthly out-of-pocket medical expenses of:
$84 for taxpayers under age 65
$149 for taxpayers age 65 and older
If actual expenses exceed these amounts, the IRS may allow the higher figure with proper documentation. Acceptable substantiation includes pharmacy records, insurance statements, proof of deductible payments, flex spending account summaries, receipts, and proof of payment.
For taxpayers with unusually high medical costs due to documented medical conditions, a doctor’s note outlining the diagnosis, prognosis, medications, therapies, and recommended treatments can significantly strengthen the claim.
Health Insurance Premiums
There are no IRS standards for health insurance premiums. Taxpayers may deduct only the actual expense incurred.
This can be substantiated with documents such as:
Social Security Award Statements showing Medicare withholdings
Employer paystubs
Annual payroll deduction summaries
Proof of direct payments to insurance providers
Dental and vision insurance premiums may also be included.
Court-Ordered Payments
Court-ordered payments, such as alimony or child support, are deductible only in the amount actually paid. The IRS typically requires a copy of the divorce judgment outlining the obligation, along with proof of monthly payments.
Example Business Profit & Loss Statement
Profit and Loss (P&L) Statement for a self-employed individual. This example highlights how "Actual Expenses" are reconciled with "IRS Collection Financial Standards."
Period: Last 3 Months Average (October – December)
Category | Monthly Average | IRS Treatment Notes |
Gross Business Income | $8,500 | Must be substantiated by bank statements. |
Business Expenses | ||
Rent (Office/Studio) | ($1,200) | Actual business cost. |
Supplies/Materials | ($800) | Actual business cost. |
Marketing/Web Hosting | ($200) | Actual business cost. |
Net Business Income | $6,300 | This is the income used for the OIC. |
Personal Living Expenses Comparison
Once the Net Business Income is determined, the IRS applies standards to personal expenses to calculate "Future Income" or "Monthly Disposable Income."
Expense Category | Actual Expense | IRS Standard Allowance | Notes |
Food & Misc. | $2,000 | $1,753 | RS uses standard unless a medical deviation is proven. |
Housing/Utilities | $4,800 | $4,500 | Example: Bergen County standard for a family of four. |
Vehicle Operating | $700 | $401 | May increase to $601 if the car has >125k miles. |
Vehicle Ownership | $550 | $588 (Limit) | Strictly limited to the national standard. |
Health Insurance | $1,100 | $1,100 | No standard; actual expense is allowed.I |
Out-of-Pocket Med | $300 | $84 | Requires documentation to justify the deviation. |
Key Takeaway for the OIC
The IRS will typically subtract the lower of your actual expenses or the IRS Standard from your income. To use the higher "Actual" figures shown above (like the $300 medical cost), you must provide substantiation such as pharmacy records or a doctor's note.
Final Thoughts
When preparing an Offer in Compromise, understanding how the IRS evaluates expenses can dramatically impact the outcome. While the Collection Financial Standards serve as the default framework, taxpayers who can clearly document their actual circumstances and demonstrate financial necessity may be able to secure allowances above the standard. Careful documentation and thoughtful presentation are critical to success.
