Unlocking the Secrets of an Offer in Compromise: A Comprehensive Guide Chapter 3 - How Much Do I Offer?
Calculating the Amount of your Offer in Compromise – What is Your Reasonable Collection Potential (RCP)?
Drum roll please!
This is what you’ve been searching for – how much do I offer? How little can I
get away with? Why not low ball them?
Here are the two
most important concepts to understand before you start your OIC.
Key Point 1 - You’re not buying a car or a house. The Settlement Agent does
not work on commission. They don’t have to settle and the decision to settle
rests entirely with the Settlement Officer. Any offer or counter-offer you make
has to be backed up by the numbers.
Key Point 2 – Determine your Reasonable Collection Potential before making
an offer. Reasonable Collection Potential (RCP) is a key factor considered by
the IRS when evaluating an Offer in Compromise (OIC). RCP refers to the amount
of money the IRS believes it can collect from a taxpayer based on their assets,
income, and future earning potential.
The IRS will consider a taxpayer's assets, including bank accounts,
investments, real estate, and personal property, to determine their RCP. The
IRS will also look at the taxpayer's income, including wages, salaries, and
self-employment income, to determine their ability to pay the tax debt.
In addition, the IRS considers the taxpayer's future earning potential,
which includes their ability to earn a living, their education and job
training, and their job market and employment opportunities. The IRS also
evaluates any other sources of income and assets, such as spousal support,
inheritance, and insurance policies.
When evaluating an OIC, the IRS uses the RCP analysis to determine if the
taxpayer can pay their tax debt in full or if the amount offered in compromise
is the most the taxpayer can reasonably pay. A taxpayer with a high RCP may be
less likely to be approved for an OIC, as the IRS is likely to be able to
collect the full amount owed through other means.
The Settlement Officer, in determining the taxpayer’s ability to pay, will
permit taxpayers to retain sufficient funds to pay basic living expenses. (“26
CFR § 301.7122-1 - LII / Legal Information Institute”) No luxuries allowed, and
the standard is not “the allowance made by the IRS are insufficient to support your
particular lifestyle.”
Also, while the monthly residual income number is usually calculated over
24 months, I have seen cases where the number is extended to the collection statute
of limitations if it is less than 36 months.
What is Legal Basis for Your Offer?
Understanding the grounds upon which you are making your
OIC is important in calculating the amount of your offer.
Currently Uncollectable
The Internal Revenue Service (IRS) may consider an account "currently
uncollectable" if the taxpayer is unable to pay the full amount of
taxes owed due to financial hardship. This means that the IRS has determined,
based on the taxpayer’s RCP, that it is unlikely that the taxpayer will be
able to pay the full amount of taxes owed in the near future.
There are several factors that the IRS will consider when determining
whether an account is currently uncollectable, starting with RCP. The IRS will
also consider the taxpayer's compliance with tax laws, including the taxpayer's
history of filing tax returns and paying taxes on time.
If the IRS determines that an account is currently uncollectable, it may
take steps to temporarily suspend collection activities, such as garnishing
wages or levying bank accounts. The IRS may also consider other options, such
as offering the taxpayer an installment agreement or Partial Pay Installment
Agreement to help the taxpayer resolve their tax debt.
It's important to note that an account being considered "currently
uncollectable" does not mean that the tax debt has been forgiven or that
the taxpayer is no longer responsible for paying the taxes owed. The taxpayer
will still be required to pay the taxes owed at some point in the future,
either through a payment plan or other arrangement.
To determine if you are in a Currently Not Collectible (CNC) status with
the IRS, you can do the following:
·
Check your tax account information online using
the IRS's "Where's My Refund?" tool or the "Get Transcript"
tool.
·
Contact the IRS directly by calling their
toll-free number at 1-800-829-1040 and asking to speak with a representative.
·
Hire an Enrolled Agent to review your tax
account information and assist you in determining your current status with the
IRS.
·
In a CNC status, the IRS will temporarily halt
collection activities while you work to resolve your financial difficulties.
Keep in mind, interest and penalties will still accrue on the balance owed, and
the IRS may periodically review your financial situation to determine if your
circumstances have changed.
If you are in a CNC status, you’re
claim of Doubt as to Collectability is stronger, in my opinion.
Doubt as to Collectability
The IRS will consider various factors when determining if there is doubt
as to collectability, such as:
•
The taxpayer's current income and expenses
•
The value of the taxpayer's assets
•
The taxpayer's ability to pay the tax debt in
full
•
The taxpayer's future income and earning potential.
•
The taxpayer's compliance history with filing
and paying taxes.
For example, if a taxpayer has very low income, high expenses, and few
assets, the IRS may determine that there is doubt as to collectability and
approve the OIC.
It's important to note that the OIC process is not easy and the IRS has
strict rules on it. Taxpayers should be prepared to provide a lot of financial
information and to justify why they can't pay the full amount of tax debt.
Doubt as to Collectability with Special Circumstance
The special circumstance of "doubt as to collectability" is one
of the most common reasons for the IRS to approve an Offer in Compromise (OIC).
When there is doubt as to collectability, the IRS recognizes that a taxpayer's
assets and income may not be sufficient to pay the full amount of tax debt
owed. In this case, the IRS may be more likely to approve an OIC, as it may be
more beneficial for the IRS to accept a smaller payment than to spend resources
attempting to collect the full amount owed.
How does the IRS collection manual instruct IRS agents to evaluate
Special Circumstances in an Offer in Compromise?
The IRS Collection Financial Standards (CFS) manual is the guide that IRS
agents use to evaluate special circumstances when considering an Offer in
Compromise (OIC). The manual provides guidelines on how to evaluate a
taxpayer's financial situation, including income, expenses, and assets, in
order to determine the taxpayer's ability to pay the tax debt in full.
The manual includes specific instructions for evaluating special
circumstances, such as:
• Financial Hardship: If a
taxpayer is facing financial difficulties, such as unemployment or high medical
expenses, the IRS may be more likely to approve an OIC. IRS agents are
instructed to take these special circumstances into account when determining
the taxpayer's ability to pay the tax debt in full.
• Doubt as to
Collectability: If the IRS determines that a taxpayer's assets and income are
not sufficient to pay the tax debt in full, they may approve an OIC. IRS agents
are instructed to consider factors such as the taxpayer's current income,
expenses, and assets when determining doubt as to collectability.
• Doubt as to Liability:
If the taxpayer can demonstrate that they don’t owe the tax debt, the IRS may
approve an OIC. IRS agents are instructed to consider the taxpayer's evidence
and arguments supporting their position of doubt as to liability.
• It's important to note
that the IRS Collection Financial Standards manual is not publicly available
and the IRS does not have to follow the manual's instruction. IRS agents have
discretion to make decisions based on their judgment, but the manual provides guidelines
for their decision-making.
• In general, special
circumstances are one of the factors that the IRS takes into account when
deciding on an OIC, but they are not the only factor. Therefore, if you believe
that you may qualify for an OIC due to special circumstances, it's important to
work with a tax professional to ensure that your application is complete and
accurate and to provide all the necessary documentation to support your case.
Another key point here – do not make the argument that the allowances
used by the Settlement Agent are insufficient because they do not support the
taxpayer’s particular lifestyle. This is just about the worst thing you could
possible say. As I mention before in the article, the Settlement Officer is not
going to allow deductions for all of your streaming services, private school,
late model car payments, vacations, sports tickets, etc. Part of your
evaluation has to be about the lifestyle you portray to the Settlement Officer.
Don’t be tone deaf.
Doubt as to Liability
I find that this usually, not always, applies to trust fund taxes. The
common example of trust fund taxes is the accountant in the payroll department
of a small business, that is not an owner, but does have responsibility for
generating the payroll checks. They may not have the discretion to say what to
pay or not to pay, but the IRS always seems to include this person in the
control group and assign them liability for the Trust Fund Taxes.
This person can make the claim that they have no role in that decision
and they can make a claim that they will sue in Tax Court. The IRS will
evaluate this as litigation risk, and thus you’ve created a doubt as to
liability.
When a taxpayer claims doubt as to liability in an Offer in Compromise
(OIC), the Internal Revenue Service (IRS) will consider whether there is a
legitimate basis for the taxpayer's claim that they do not owe the full amount
of taxes that have been assessed.
In order for the IRS to consider a claim of doubt as to liability, the
taxpayer must provide sufficient evidence to support their claim. This may
include documentation or other evidence showing that the taxpayer did not owe
the taxes in question, or that the amount of taxes owed was incorrect.
The IRS will carefully review all of the evidence provided by the
taxpayer and consider whether it is sufficient to support the claim of doubt as
to liability. If the IRS determines that there is a legitimate basis for the
claim, it may consider accepting the OIC on that basis. If the IRS determines
that the claim is not supported by sufficient evidence, it may reject the OIC
and require the taxpayer to pay the full amount of taxes owed.
Effective Tax Administration
Effective tax administration in an OIC process requires careful
consideration of all factors that contribute to a taxpayer's ability to pay
their tax debt, including their current financial situation, future earning
potential, and asset equity.
The IRS considers a taxpayer's reasonable living expenses, including
necessary housing, food, clothing, transportation, and medical expenses, when
determining their ability to pay the tax debt. The IRS also considers the
taxpayer's ability to pay the tax debt in full within the remaining collection
statute of limitations.
The IRS evaluates all information provided by the taxpayer and may
request additional documentation to verify their financial information. The
goal of effective tax administration in an OIC process is to provide a fair and
impartial resolution that both meets the taxpayer's ability to pay and the
government's obligation to collect the tax debt.
Types of Payments
Calculating an Offer in Compromise (OIC) involves determining the amount
of money that a taxpayer can reasonably afford to pay to settle their tax debt
with the government. There are two commonly used payment methods used to calculating an offer: the lump sum cash offer
and the periodic payment offer.
Lump Sum Cash Offer: In this method, the taxpayer makes a lump sum
payment to the government to settle the tax debt in full. The amount of the
offer is typically based on the taxpayer's ability to pay (RCP) and the liquidation
value of their assets.
Periodic Payment Offer: In this method, the taxpayer makes regular
payments over an extended period of time, typically not exceeding 24 months.
The amount of the offer is based on the taxpayer's monthly income and expenses,
and the government's assessment of the taxpayer's ability to pay.
When the OIC is based on the Doubt as to Collectability,
the Settlement Officer will determine:
• The amount of resources
available from your assets that can be used as part of a settlement. For
example, do you have any equity in your home? Any equity in a vacation home?
Any liquid assets such as a 401k or other assets? How much can the taxpayer
raise by selling assets? This is the liquidation value of your assets.
• Using the taxpayer’s monthly
income numbers, what is their Calculation of Future Income? Typically the
Settlement Officer will use the monthly net income spread over 24 months if a
periodic payment method is submitted. However, the length of time used could
extend to the Collection Statute of Limitation Period or shorten to the period
of time for payment if it is less than 24 month but greater than 5 months. This
is you RCP.
While this is the basic format of the Settlement Officer’s calculation,
it will vary if the basis for the OIC is Doubt as to Collectability
versus Doubt as to Liability. The Taxpayer should always keep in mind
certain settlement consideration that are standard to any OIC agreement, some
of which may be different than settlement via a regular Partial Pay Installment
Agreement, which is not OIC. These considerations – such as the requirement
that the taxpayer remain compliant for five years, can be used as leverage with
the IRS to get the Settlement Officer to agree to an OIC. For example, the total
collected under a Partial Pay Installment Agreement may be more than the amount
offered under an OIC. The Settlement Officer may elect to accept the OIC
because in so doing, the taxpayer agrees to stay compliant for five years,
where in the PPIA, there is no such requirement.
So, Bottom Line Me Here – What Does All This Mean? How
Much Do I Offer?
The basic formula is to add Step 1 and Step 2 results together. Compare that
total to your total tax debt. How much can 24 months of RCP cover of your total
tax debt? Would liquidation of assets change that?
Step 1 – How much Can You Liquidate From Your Assets? The Settlement
Officer will not require that you liquidate assets because its your offer.
However, a Collection Officer will look at the situation much differently,
strongly suggesting that you sell the asset.
Step 2 – What is Your RCP calculated over 24 months? Understand that RCP
is not calculated based on the standard of living to which you’ve become
accustomed. Neither is it a poverty standard. I find that the IRS is much more
understanding lately of the toll inflation has taken on everyday cost of
living. Realistic calculations supported by documentation is the only thing you
can hang your hat on in this process.
Step 3 – Calculation. This is where the art form of an Offer in
Compromise happens.
Example 1 – Total Tax debt of $60,000. Taxpayer has $0 in Step 1 dollars.
Their Step 2 dollars are $30,000. Taxpayer offers $30,000 paid over 24 months. This
offer has a high likelihood of acceptance.
Example 2 – Same Total Debt. Taxpayer has $10,000 in liquid assets, and $12,000
in Step 2 dollars. I’d offer $10,000 lump sum plus $500 for 5 months, total of
$12,500. I’d rely on the Effective Administration of Tax argument here. The
taxpayer will be in and out of the IRS’ view within 6 months. Win – win.
Example 3 – Same total Debt. Taxpayer has $0 in Step 1 dollars and $12,000
in Step 2 dollars. Taxpayer does not have anything extra ordinary coming by way
of job prospects or large future raises. I’d offer $10,000 over 24 months, and
the counter to $12,000 if needed. If accepted, taxpayer saves $50,000.
The taxpayer should attempt to calculate their own RCP and formulate a
payment amount based on their RCP, taking into account any mitigating or
supporting factors that they can put forward. Note that I’ve not mentioned a low-ball offer,
or anything about pennies on the dollar, as many national tax resolution firms
advertise. Do yourself a favor and put in the time needed to craft a successful
OIC.
