The Reasonable Collection Potential is the estimated worth of a collection at the time of sale. This is important to collectors, like the IRS because it can help them understand what their collection is worth and how to price it when they are ready to sell.
When a tax liability cannot be paid using equity in assets or monthly installment payments before the collection statute of limitations runs out, a taxpayer may be eligible for an offer in compromise (OIC). They might be able to settle their tax debt by offering the IRS their “reasonable collection potential” or “RCP,” which is what they hope to collect.
This number is arrived at by first figuring out the “net equity” or what the taxpayer would actually receive after selling all of their assets. Then, that figure is discounted for things like marketability and time value of money.
RCP and Offer of Compromise
In case you’re not able to pay your tax debt in full, you may be eligible for an offer in compromise (OIC). An OIC is an agreement between you and the IRS that allows you to settle your tax debt for less than what you owe.
The RCP Formula is one of the factors that’s used to determine if you’re eligible for an OIC. The IRS looks at your RCP to see if it’s realistic for you to pay your tax debt in full. If it’s not, they may be willing to accept a lower offer from you.
If you’re considering an OIC, there are a few things you should know. First, the IRS will only consider your offer if it’s made in good faith. This means that you must believe that you can’t pay your tax debt in full and that the amount you’re offering is the most you can afford to pay.
The second thing to know is that the IRS will not accept your offer if they think they can collect more money from you through other means, such as wage garnishment or levying your bank accounts.
Lastly, you should know that the RCP Formula is just one of many factors the IRS considers when evaluating an offer in compromise. They also look at your ability to pay, your income, and your expenses.
So, if you’re considering an offer in compromise, be sure to keep the RCP Formula in mind. It’s just one of the things you’ll need to consider when making your decision.
Things You May Want to Consider
There are a few things you should keep in mind when considering an offer in compromise. First, the IRS will only accept your offer if it’s made in good faith. This means that you must believe that you can’t pay your tax debt in full and that the amount you’re offering is the most you can afford to pay.
The second thing to know is that the IRS will not accept your offer if they think they can collect more money from you through other means, such as wage garnishment or levying your bank accounts.
Lastly, you should know that the RCP Formula is just one of many factors the IRS considers when evaluating an offer in compromise.
What The IRS Puts Into Consideration When Applying The RCP Formula
1. Assets
The first thing you’ll need to do is list out all of your assets. This includes anything that can be sold for cash, such as real estate, stocks, bonds, and jewelry. You’ll also want to include any vehicles you own, as well as any other property that could be used to generate income.
Your home equity is calculated by subtracting your outstanding mortgage balance from the estimated fair market value of your home.
Your other assets (vehicles, artwork, jewelry, etc.) are usually appraised and the net equity value is determined. This figure is then discounted for such things as marketability and the time value of money.
2. Income
Your current monthly income is another important factor in the RCP formula. The IRS will want to know how much money you’re bringing in each month, as well as any other sources of income you may have. This includes things like alimony, child support, and investments.
Your monthly expenses are also taken into consideration. Things like your mortgage payment, car payment, credit card bills, and other necessary living expenses are deducted from your income.
The IRS will also look at your disposable income, which is the money you have leftover after paying your monthly expenses. This is the money you would have available to put towards a settlement offer.
3. Future Income
The RCP Formula also takes into account your future income by estimating what you can expect to earn over a specific period of time. This is done by using either the IRS wage and earning statements or by using a reasonable estimate based on your occupation and work history.
Income from self-employment is calculated by taking the average of the past three years’ net income, then subtracting business expenses and 50% of Social Security and Medicare taxes.
This may be a little confusing, but it’s important to remember that your “reasonable collection potential” is just an estimate. The IRS recognizes that there are many variables that go into calculating this number, so they allow for some flexibility when determining an offer in the compromise settlement amount.
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