The IRS employs a very specific formula for determining whether to accept an Offer in Compromise. First, the Offer in Compromise must be for a sum that is greater than the reasonable collection potential (“RCP”) of the taxpayer in question. This RCP figure represents the taxpayer’s ability to pay the original taxes owed.( Internal Revenue Service, Topic 204 – Offers in Compromise). Included in the RCP calculus is a taxpayer’s monthly income and assets. If, for example, the IRS decides that a person is able to pay the current amount due through a combination of a reasonable contribution from monthly income and liquidation of assets, then that taxpayers Offer of Compromise will likely be rejected.
Generally speaking, the IRS has identified three grounds for acceptance of an Offer of Compromise; doubt as to liability, doubt as to ability to collectability, and effective tax administration. While doubt as to collectability is based on the RCP calculus mentioned above, doubt as to liability and effective tax administration are somewhat less cut-and-dry. Doubt as to liability requires the taxpayer to show a substantial doubt as to the IRS’ calculation of the amount due. What is substantial is, of course, a determination to be made by the IRS, and it is up to you to provide the basis for this putative IRS error.
Meanwhile, the effective tax administration basis for an Offer of Compromise, while somewhat similar to doubt as to collectability in that in may involve financial hardship, is distinct in the sense that here, the taxpayer is actually capable of paying their tax bill. Rather, the taxpayer’s particular situation may provide a justification for reducing the total tax bill be reduced, for example, in cases where collecting the full amount would result in financial hardship, or where other extenuating circumstances present themselves. Once again, what constitutes extenuating circumstances,” or in the words of the IRS, what “would be unfair and inequitable because of exceptional circumstances,” is largely in the discretion of the IRS.
The IRS typically calculates the settlement amount by taking a person’s disposable income over a 12 month period (24 months for Periodic Payment Offers) then adding the equity a person has in their assets. For example, a taxpayer that has $100 disposable income per month and $10,000 of assets can settle their tax debt for $22,000 (12 months x $100 per month disposable income plus $10,000 assets). The devil of course is in the detail. Many Offers can be lost because a taxpayer did not properly report his or her income and expenses or failed to properly report the value of his or her assets. Before submitting an Offer, you should consult with an Attorney experienced in preparing Offers in Compromises. A properly prepared Offer can help you settle your tax debt for the lowest amount possible.
For more information, please see:
- Offer in Compromise Main Page
- More about Offer in Compromises
- The Offer in Compromise Process
- An Overview of an Offer in Compromise
- Eligibility Requirements
- Pros and Cons of an Offer in Compromise
- How the IRS Evaluates an Offer in Compromise
- Why Retain RJS Law for your Offer in Compromise?
- National Tax Agencies