Contact and experienced tax professional to evaluate the reasonable collection potential for your OIC.
A common misconception about the IRS’s offer in compromise program is that you can offer any amount of money to the IRS and then just negotiate a settlement. In most cases, the IRS will not accept an OIC unless the amount offered is equal to, or greater than, your reasonable collection potential or “RCP.” The RCP is how the IRS measures the taxpayer’s ability to pay, and it is the focus of this article.
An offer in compromise, or OIC, allows you to settle your federal tax debt with the Internal Revenue Service for less than the full amount you owe. Contact Columbus, Ohio tax lawyer Matthew R. Porter, Esq. LL.M. for a free evaluation of your eligibility to resolve your debt under an IRS offer in compromise.
What is “Reasonable Collection Potential?”
When the IRS evaluates an offer in compromise, the offer examiner assigned to the case must determine your ability to pay the tax liability. In other words, the IRS must determine your reasonable collection potential. The RCP is the value that can be realized from your assets, plus anticipated future income less certain amounts allowed for basic living expenses. In simple terms, the RCP is the amount of money that the IRS would accept to compromise a tax liability. It is basic mathematics. Take the net realizable equity in your assets and add that figure to your future monthly disposable income.
Why is this important? The RCP calculation is extremely important. You must properly and meticulously calculate the RCP before submitting your OIC to the IRS. The amount you offer must be equal to, or exceed, the RCP for the IRS to approve your OIC. In addition, if your RCP exceeds the amount of your tax debt, you would not be eligible for OIC, and you should consider another IRS collection alternative, such as installment agreement.
The IRS’s Policy Statement 5-100 is instructive on this point:
The Service will accept an offer in compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. An offer in compromise is a legitimate alternative to declaring a case currently not collectible or to a protracted installment agreement. The goal is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the Government. Policy Statement 5-100.
How do you calculate the RCP?
Again, the calculation includes determining the net realizable equity in assets and adding that amount to future income. See IRM 5.8.4..3.1. The assets included in the calculation include real property, automobiles, bank accounts, and other property. A key consideration in the net realizable equity calculation is determining the value of the property, applying any quick sale discounts to the property, and deducting loans secured by the property. The value of the property may not be immediately clear. Thus, you may have to defer to public records or retain a qualified appraiser to give a formal opinion of fair market value.
Next, you must add your future income to the value of your net realizable equity in assets. In calculating your future income, you will be asked to prepare Section 7 of Form 433-A (OIC). This portion of the OIC is the most critical. Your actual monthly expenses may be vastly different than the amounts that the IRS actually accepts. The IRS has national and local expense standards that are compared to a taxpayer’s actual reported expenses.
The IRM states the issue this way:
Taxpayers are allowed the National Standard Expense amount for their family size, without a need to substantiate the amount actually spent. If the total amount claimed is more than the total allowed by the National Standards, the taxpayer must provide documentation to substantiate and justify that the allowed expenses are inadequate to provide basic living expenses. All deviations from the national standards must be verified, reasonable and documented in the case history. IRM 5.8.5.22.1.
The difficulty here is that taxpayers generally have greater monthly expenses than the amounts the IRS allows. Thus, it is very important to analyze the reported expenses and run them through the Internal Revenue Manual’s financial analysis provisions before submitting the offer. That way, the taxpayer can have a realistic understanding of their future income portion of the RCP prior to any action by the IRS’s offer examiner.
Contact an Experienced Ohio Tax Attorney
Offer in Compromise Representation | Columbus Tax Lawyer
If you owe the IRS a tax debt, contact the experienced tax lawyer at Porter Law Office, LLC to discuss your eligibility under the IRS’s offer in compromise program. Some tax debt relief companies will make promises that are simply not true. Columbus, Ohio tax attorney Matthew R. Porter, Esq. LL.M. understands that not everyone qualifies for an offer in compromise. By analyzing your reasonable collection potential, Mr. Porter will be able to determine your eligibility for an IRS collection alternative, including an offer in compromise. Contact the experienced Columbus, Ohio tax lawyer at Porter Law Office, LLC today for a free consultation to discuss your particular IRS tax needs and options to file for an offer in compromise.