Reasonable Collection Potential For An Offer In Compromise
An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer’s tax liabilities for less than the total amount owed. If a taxpayer can fully pay the liabilities through an installment agreement or other means, the taxpayer will, in most cases, not be eligible for an OIC. In most cases, the IRS will not accept an OIC unless the amount offered by the taxpayer is equal to or greater than the reasonable collection potential (the RCP). The RCP is how the IRS measures the taxpayer’s ability to pay.
The RCP includes the value that taxpayers can realize from their assets, such as real property, automobiles, bank accounts, and other property. In addition to property, the RCP also includes anticipated future income, less specific amounts allowed for basic living expenses.
The IRS may accept an OIC based on three grounds.
- First, acceptance is permitted if there is doubt as to liability. This ground is only met when there is a genuine dispute about the existence or amount of the correct tax debt under the law.
- Second, acceptance is permitted if there is doubt that the amount owed is fully collectible. Doubt as to collectability exists in any case where the taxpayer’s assets and income (known as the “reasonable collection potential”) are less than the total amount of the tax liability.
- Third, acceptance is permitted based on effective tax administration. An offer may be accepted based on effective tax administration when there is no doubt that the tax is legally owed. The IRS can collect the total amount owed, but requiring payment in full would either create an economic hardship or be unfairly inequitable because of exceptional circumstances.
Submitting An OIC
When submitting an OIC based on doubt as to collectability or based on effective tax administration, taxpayers must use the most current version of Form 656, Offer in Compromise. And also submit Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and/or Form 433-B (OIC), Collection Information Statement for Businesses.
Taxpayers may choose to pay the offer amount in a lump sum or installment payments. A “lump sum offer” is defined as an offer payable in 5 or fewer installments within five or fewer months after the offer is accepted. An offer is called a “periodic payment offer” under the tax law if it is payable in 6 or more monthly installments and within 24 months after the offer is accepted.
With an offer in compromise, taxpayers pay the IRS only the Reasonable Collection Potential (RCP) instead of the full amount of taxes owed. Therefore, the proper calculation of the Reasonable Collection Potential is the most important aspect of a favorable outcome (an accepted offer at the lowest possible amount).
The reasonable collection potential is the amount of money the IRS thinks they can collect from you for your tax debts. It is the liquidation value of your assets plus your monthly disposable income. Your reasonable collection potential is calculated as the total of the following:
- Assets: The amount collectible from your net realizable equity in assets.
- Future Income: The amount collectible from your expected future income after allowing for payment of necessary living expenses.
- Valuing Future Income
- Lump-Sum Cash Offers: If the offer is payable in five or fewer installments in five months or less, valuation is projected for the next 12 months or the remaining statutory period, whichever is less.
- Periodic Payment Offers: Projected for the next 24 months or the remaining statutory period, whichever is less.
Net Realizable Equity
For offer purposes, assets are valued at net realizable equity, which is defined as quick sale value (QSV) less amounts owed to secured lien holders with priority over the federal tax lien, if applicable, and applicable exemption amounts.
Future Income Valuation
The IRS will ordinarily value income based on the last tax return, the previous three months’ paystubs, or the previous six months’ profit or loss. But this may not tell your whole story, and there may be problems of which you could use professional representation from Tax Samaritan to make sure that your story is heard and how the IRS ultimately values future income. For example, if you have recently become unemployed or have imminent retirement.
What Is Generally An Acceptable Offer In Compromise – A Reasonable Collection Potential That Can Be Proven
You must offer the IRS an amount of money at least equal to, or greater than, your reasonable collection potential if you want the IRS to approve your Offer in Compromise.
However, if your reasonable collection potential is equal to or greater than the amount of tax debts you owe, then you probably will not qualify for an Offer in Compromise.
Our goal at Tax Samaritan is to provide the best counsel, advocacy, and personal service for our clients. We are not only tax preparation and representation experts but strive to become valued business partners. Tax Samaritan is committed to understanding our client’s unique needs; every tax situation is different and requires a personal approach in providing realistic and effective solutions.
If you are considering an offer in compromise for the resolution of your tax liability, please click the button below to request assistance from Tax Samaritan to ensure that your Reasonable Collection Potential (RCP) is appropriately calculated and to determine whether you have a reasonable offer that has a good chance of being accepted at the lowest possible amount.