Reasonable Collection Potential: The Key to a Successful Offer-in-Compromise
The offer-in-compromise program is of great help to taxpayers who owe the IRS. It allows them to settle their outstanding tax debts for a lesser amount, as determined by a formula. Savings can range from thousands to hundreds of thousands of dollars. Power Tax Representation in Breckenridge, Colorado specializes in preparing offers-in-compromise. Terrence Power, CPA, has over 40 years of experience dealing with the IRS.
The key to submitting a successful offer-in-compromise is calculating what’s known as Reasonable Collection Potential, or simply RCP. There are two components of RCP: the first is your net equity in assets, and the second is your future income potential.
The assets that the IRS will look at include:
- The amount of cash you have available
- Your investments and retirement accounts
- Any cash surrender value of life insurance policies
- Equity in real estate owned
- Value of your vehicles
- Value of personal assets like collectibles
Some of the asset values are discounted for quick sale values and allowances are provided by the IRS for others.
The income components of future income include:
- Wages if you’re an employee
- Net business income if you’re self-employed
- Any net rental income
- Social security payments received
- Dividends and interest
- Pension distributions
- Alimony received
- Child support received
- Any other sources of cash received
Expenses allowed against the future income include:
- Cost of food, clothing and miscellaneous expenses
- Housing and utilities
- Automobile ownership and operating costs
- Public transportation costs
- Health Insurance
- Out-of-pocket healthcare costs
- Court-ordered payments
- Child and dependent care costs
- Life insurance premiums
- Current year taxes
- Secured debts
- Delinquent state taxes
Some of the expenses are limited to the lesser of actual expenses or IRS standard amounts which are published each year.
The calculation of RCP takes the income less expenses to come up with cash flow. This amount is then multiplied by 12 or 24 months (depending on whether the offer is a lump sum or deferred payment offer) and added to the net equity in assets.
If the taxpayers show the ability to pay-in-full their tax liability within the remaining collection statute of limitations the IRS will decline the offer. In addition, if the offer is accepted the IRS will require that the taxpayer be in compliance by paying their tax liabilities on a current basis over the next 5 years after the offer is accepted.
Preparing and submitting an offer that will be accepted is a very complex and difficult matter and no taxpayer should attempt to do this on their own. I understand the rules and guidelines and can tell you rather quickly what your best option is. Since it can take up to a year for the IRS to review your offer time is of the essence. So, call Terrence Power CPA at 970-453-3997 and get the professional help you need.