Offer in Compromise
Doubt as to Collectibility
What is "Compromising" a Tax Liability?
Compromising a tax liability is an art that requires both skill and expertise. The IRS may collect less than the full amount of tax (Internal Revenue Code §7122). This is not a taxpayer right. The IRS always gets to decide whether or not to grant this privilege. To make a successful Offer in Compromise, the outcome needs to be pitched as favorable to the IRS. There are two primary baits. The IRS wants to avoid (1) wasting effort and time, and (2) tarnish its reputation. Here, we are dealing with point (1) in an Offer in Compromise – Doubt as to Collectibility. Continue reading below.
To learn more about the other two types of an Offer in Compromise see: Effective Tax Administration (the IRS wants to avoid a public outcry), and Doubt as to Liability (you don’t actually owe).
What is "Doubt as to Collectibility"?
The IRS needs to have a serious doubt that it can collect the full amount of assessed tax. The Reasonable Collection Potential (RCP) must be much larger than the tax due. The RCP has three components.
- Monthly net income. What is the taxpayer’s monthly income minus monthly expenses?
- Number of months left for collection. How many months are left until the Collection Statute Expiration Date?
- Liquid value of assets. For example: bank account balances, or the value of a house minus the amount of mortgage left.
The Reasonable Collection Potential (RCP) is made up of these three components: (1) net income times (2) months left plus (3) net assets. The resulting number will determine whether or not you qualify for the Offer in Compromise.
Do I Qualify?
You need to be sure that you qualify before submitting an Offer in Compromise. Otherwise, you merely wasted time, and money, and extended the time that the IRS has to collect money from you.
First of all, your Reasonable Collection Potential (RCP) needs to be much smaller than your tax liability. Grossly smaller. Say, you owe $50,000 and your RCP is $4,000. Your RCP is drastically smaller than the tax owed, and you are a good candidate for an Offer in Compromise. If, on the other hand, the RCP is $40,000 you are not a good candidate for an Offer in Compromise. The IRS is not going to wipe out your tax owed when you are able to pay almost everything.
Contact us to discuss whether you qualify.
Should I Make an Offer in Compromise?
Even if you qualify for an Offer in Compromise it is still important to consider all other options. Perhaps you are better served with a less intrusive option, such as a Partial Pay Installment Agreement. Or, you might consider a Bankruptcy if there is non-tax debt. Be sure to find out how much of your tax is dischargeable in Bankruptcy, and how much is not.
Contact us to discuss your options.