Through an Offer in Compromise, taxpayers agree to pay the
IRS only the reasonable collection potential instead of
the full amount of taxes owed. Calculating the Reasonable
Collection Potential is the most important element in
determining the success of your Offer in Compromise.
Reasonable Collection Potential
The reasonable collection potential is the amount of
money the IRS thinks they can collect from you for your
tax debts. It is basically the liquidation value of your
assets plus your monthly disposable income over a period
of 4 or 5 years.
You must offer the IRS an amount of money at least
equal to, or greater than, your reasonable collection
potential if you want the IRS to approve your Offer in
Compromise.
If your reasonable collection potential is equal or
greater than the amount of tax debts you owe, then you
probably will not qualify for an Offer in Compromise.
Calculating the Reasonable Collection Potential
In a nutshell, your reasonable collection potential is
calculated as follows:
- 100% of your cash, investments, and accounts
receivable, plus
- the "realizable value" of your vehicles, real
estate, and personal assets, plus
- your monthly disposable income over a period of 48
months or 60 months.
Realizable Value of Your Assets
The realizable value of your cars, real estate,
and personal property is calculated as follows:
- Fair market value of the property, times
- 80% (the quick sale discount factor), minus
- the balance of any loans secured by the property.
We could write this another way:
- Fair market value times 80% equals the Quick
Sale Value
- Quick Sale Value minus Outstanding Secured
Loans equals the Realizable Value
For example, you may own a home that has been appraised
at $120,000. Eighty percent of the appraised value is
$96,000 (this is the quick sale value). The balance on
your first and second mortgages totals $88,000. This
leaves you with a realizable value of $8,000 for your
house. This represents the actual amount of cash you could
probably realize if you were to sell your house today.
Monthly Disposable Income Over 48 or 60 Months
Your monthly disposable income comes from the budget
prepared in Section 9 of Form 433-A. You should use the
lower of your actual expenses or the IRS Collection
Financial Standards.
Subtract Total Living Expenses (Line 45 of Form 433-A)
from Total Income (Line 34). (These amounts are carried to
Line 12 of the Worksheet.)
Multiply this monthly figure by 48 months if you
plan to pay off your Offer in Compromise within 90 days
from the date the IRS notifies you that your Offer has
been accepted.
Multiply this monthly figure by 60 months if you
plan to pay off your Offer in monthly installments over a
period longer than 90 days but less than 24 months.
Total Offer Amount
On IRS Form 656, you must indicate how much money you
are willing to pay in return for the IRS approving your
Offer in Compromise. This is your Offer amount.
Your Offer amount must be equal to, or greater than, your
Reasonable Collection Potential as shown on the Worksheet
for Form 433-A.
Note
Very often, what makes or breaks an Offer in Compromise
is the monthly budget. That's because the monthly
disposable income is multiplied by 48 or 60. So even small
adjustments to the monthly budget can have big
consequences for the success of your Offer. The key to a
successful budget is thorough and comprehensive
documentation of all your expenses, together with strong
negotiation to ensure that the IRS allows more expenses as
part of your necessary living expenses.
