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 2Determine 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.


 Let’s get into the details:


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.


Please click here for the other chapters in this series. 

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