how much can the client pay?
by eric l. green
tax rep network
no irs program is more interesting yet misunderstood than the irs’s offer in compromise program. for taxpayers who owe money to the irs, between 15 million and 20 million of them, the thought that they can settle their back tax debt for less than the amount owed is an answer to many of their prayers.
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many people have seen the late-night television ads or heard the satellite radio spots: the taxpayer, who seems just like them, owed huge sums of money to the irs and was being abused by the callous tax machine when the advertising company came to the rescue and settled that tax debt for “pennies on the dollar.”
are these ads telling us the truth? can taxpayers really settle their tax debt for little to no money? the answer is yes, they can, but it depends upon their financial situation.
you need to know two crucial facts to understand why the irs agrees to settle tax debts for less than the amount owed.
the first is that the irs only has ten years to collect a tax debt. so as many debts begin to age, the irs’s ability to collect them diminishes.
besides the passage of time, the irs can only collect what a person can pay. the irs uses a formula to determine how much it can expect to collect from the taxpayer called “reasonable collection potential,” or “rcp.” rcp determines the net equity in the taxpayer’s assets and the future income the irs believes the taxpayer will have to pay toward the tax debt. rcp is the cornerstone of irs collection. in cases where the taxpayer’s rcp indicates they cannot fully pay the tax debt within the time remaining on the irs collection statute, the irs is open to settling the tax debt for the rcp amount.
tax professionals must review the rcp calculation with their client to determine if the client is a candidate for an offer in compromise, and if so, what the rcp calculation indicates should be offered, and whether some financial changes can be made to help the taxpayer become a candidate for an offer in compromise. an example of these changes is for the client to begin paying any back alimony or child support. these are allowable court-ordered payments, but the taxpayer can only get the expense applied to their rcp if they are actually paying it.
the same holds true with federally guaranteed student loans. if the taxpayer owes the money and is paying the debt, then the irs will subtract it as an allowable expense from the rcp calculation.
so do offers in compromise work? yes, they do for taxpayers who meet the criteria to compromise. tax professionals must understand the rules to determine who can compromise and help their client bring their tax nightmare to an end.