How Does the IRS Determine Reasonable Collection Potential?

How Does the IRS Determine Reasonable Collection Potential?

IRS Offers in Compromise are evaluated based on a taxpayer’s reasonable collection potential (RCP). If your offer is at least as much as your RCP, it should be accepted.

RCP is basically the equity you have in your assets added to your monthly disposable income. For this reason, Offers in Compromise are a personalized tax resolution method. If your neighbor or friend had their tax debt settled for two cents on the dollar, that doesn’t mean the IRS will give you the same deal.

Equity

If you have equity in assets, the IRS will view that as something that could be sold or borrowed against and used to pay your tax debt. This includes everything: bank accounts, retirement accounts, real estate, personal property. 

There are a few adjustments to be made when determining your equity in assets. First, your equity would not include any liens or security interests a lender has in your property. 

Next, the IRS only looks at the quick sale value of your assets. This can be around 80% of the asset’s fair market value, but it can also be more or less depending on the asset. The purpose of this step is to estimate how much cash you could get out of an asset immediately to pay the IRS.

You are also permitted certain exemptions for certain types of assets. The leftover amount is your equity that will be used to calculate your RCP.

Monthly Income

The IRS will take your monthly income, subtract expenses, and see much money you could use to pay off your tax debt each month. But you won’t be allowed to use all of your actual expenses.

If you spend an excessive amount on clothes, the IRS isn’t going to write off your tax debt because of it. Instead, there are statutorily set amounts you can use for different types of expenses.

Once your remaining monthly income has been calculated, you’ll multiply this amount by either 12 or 24 (depending on your repayment term) to get your “future remaining income”. This is the amount that is added to your net equity.

Your offer must be at least as much as the sum of these two amounts.

Special Circumstances

The RCP calculation isn’t always straightforward. There can be plenty of room for negotiation regarding each component of your RCP.

There can also be special circumstances that warrant acceptance of an offer below your RCP. Talk to a tax attorney to get help submitting and negotiating your Offer in Compromise.

Get help settling your tax debt by calling The Gartzman Law Firm at (770) 939-7710. We can help you negotiate an Offer in Compromise or find another creative solution to your tax problems.

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