Calculating Your Reasonable Collection Potential for an Offer in Compromise

When facing substantial tax debt, the IRS’s Offer in Compromise (OIC) program can provide a lifeline for taxpayers seeking relief. However, before the IRS considers accepting an OIC, they assess the taxpayer’s ability to pay through a calculation called the Reasonable Collection Potential (RCP). Understanding how the IRS determines your RCP is crucial for navigating the OIC process effectively. In this article, we’ll delve into the intricacies of calculating your Reasonable Collection Potential, explore the factors involved, and provide insights to help you prepare a successful OIC submission.

What is Reasonable Collection Potential (RCP)?

The Reasonable Collection Potential (RCP) is a calculation used by the IRS to determine a taxpayer’s ability to pay their tax debt. It serves as the basis for evaluating whether to accept an Offer in Compromise, which allows taxpayers to settle their tax liabilities for less than the full amount owed. The RCP considers various financial factors to assess the taxpayer’s ability to make a lump sum offer or structured payment plan that reflects their true ability to pay.

Factors Included in RCP Calculation

1. Income: The IRS considers your current income, including wages, self-employment earnings, rental income, and any other sources of income. They may also assess your earning potential based on your employment history, skills, and education.
2. Expenses: Allowable living expenses, such as housing, utilities, transportation, food, and healthcare, are factored into the RCP calculation. The IRS uses national and local standards to determine reasonable expense amounts.
3. Assets: The IRS evaluates your assets, including bank accounts, investments, real estate, vehicles, and personal property. They may also consider the equity in your assets and your ability to liquidate them to satisfy your tax debt.
4. Future Income Potential: If you have the ability to increase your income in the future, the IRS may consider this in the RCP calculation. Factors such as job prospects, education, and career advancement opportunities may be taken into account.
5. Other Financial Obligations: Debts and obligations, such as mortgage payments, student loans, and child support payments, are considered when determining your ability to pay. The IRS may allow certain expenses to be deducted from your income to reflect your true financial situation.

Steps to Calculate Your RCP

1. Gather Financial Information: Collect documentation of your income, expenses, assets, and debts. This may include pay stubs, bank statements, tax returns, loan statements, and other relevant financial records.
2. Determine Total Monthly Income: Add up all sources of income, including wages, self-employment earnings, rental income, and any other income sources.
3. Calculate Allowable Expenses: Deduct allowable living expenses from your total monthly income. The IRS provides national and local standards for housing, utilities, transportation, food, and healthcare expenses.
4. Assess Asset Equity: Determine the equity in your assets, including bank accounts, investments, real estate, vehicles, and personal property. Subtract any outstanding loans or liens against your assets.
5. Estimate Future Income Potential: Consider your future income potential based on factors such as employment prospects, education, and career advancement opportunities. Be realistic in your assessment of future earning capacity.
6. Factor in Other Financial Obligations: Subtract any other financial obligations, such as mortgage payments, student loans, and child support payments, from your available income.
7. Calculate Lump Sum Offer or Monthly Payment Plan: Based on your RCP calculation, determine the amount you can afford to offer as a lump sum or through a structured payment plan.

Tips for a Successful OIC Submission

1. Provide Accurate Financial Information: Ensure that all financial information provided to the IRS is accurate and complete. Any discrepancies or omissions could delay or jeopardize your OIC submission.
2. Document Your Financial Hardship: If you are experiencing financial hardship, provide documentation to support your claim. This may include medical bills, unemployment records, or other evidence of financial distress.
3. Seek Professional Assistance: Consider seeking assistance from a tax professional, such as a certified public accountant (CPA) or tax attorney, when preparing your OIC submission. A professional can help you navigate the process and maximize your chances of success.
4. Be Patient and Persistent: The OIC process can be lengthy, and it may take time to negotiate with the IRS. Be patient and persistent in following up on your submission and providing any additional information requested.

Conclusion

Calculating your Reasonable Collection Potential (RCP) is a critical step in preparing a successful Offer in Compromise (OIC) submission to the IRS. By understanding the factors involved in the RCP calculation and following the steps outlined in this article, you can accurately assess your ability to pay your tax debt and determine an appropriate offer amount. Remember to provide accurate financial information, document any financial hardships, seek professional assistance if needed, and be patient and persistent throughout the OIC process. With careful preparation and diligence, you can increase your chances of securing relief from your tax debt through an Offer in Compromise.