How does irs calculate rcp

In determining ability to pay, the Secretary will permit taxpayers to retain sufficient funds to pay basic living expenses. To guide this determination , guidelines published by the Secretary on national and local living expense standards will be taken into account. A In general. The IRS also may request information regarding the assets and income of the nonliable spouse for the purpose of verifying the amount of and responsibility for expenses claimed by the taxpayer.

B Exception. B Although taxpayer has certain monthly income, that income is exhausted each month in providing for the care of dependents with no other means of support; and. C Although taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets and liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses.

A Taxpayer has a history of noncompliance with the filing and payment requirements of the Internal Revenue Code ;. B Taxpayer has taken deliberate actions to avoid the payment of taxes; and. C Taxpayer has encouraged others to refuse to comply with the tax laws.

The taxpayer has assets sufficient to satisfy the tax liability. The taxpayer provides full time care and assistance to her dependent child, who has a serious long-term illness. It is expected that the taxpayer will need to use the equity in his assets to provide for adequate basic living expenses and medical care for his child. The taxpayer is retired and his only income is from a pension. Liquidation of the retirement account would leave the taxpayer without an adequate means to provide for basic living expenses.

The taxpayer is disabled and lives on a fixed income that will not, after allowance of basic living expenses, permit full payment of his liability under an installment agreement. The taxpayer also owns a modest house that has been specially equipped to accommodate his disability. However, because of his disability and limited earning potential, the taxpayer is unable to obtain a mortgage or otherwise borrow against this equity.

In October of , the taxpayer developed a serious illness that resulted in almost continuous hospitalizations for a number of years. The taxpayer has not filed tax returns since that time. He discovers that the IRS prepared a substitute for return for the tax year on the basis of information returns it had received and had assessed a tax deficiency.

When the taxpayer discovered the liability, with penalties and interest, the tax bill is more than three times the original tax liability. The taxpayer learns that he can earn a higher rate of interest on his IRA savings by moving those savings from a money management account to a certificate of deposit at a different financial institution.

Prior to transferring his savings, the taxpayer submits an e-mail inquiry to the IRS at its Web Page, requesting information about the steps he must take to preserve the tax benefits he has enjoyed and to avoid penalties.

The IRS responds in an answering e-mail that the taxpayer may withdraw his IRA savings from his neighborhood bank, but he must redeposit those savings in a new IRA account within 90 days. The taxpayer withdraws the funds and redeposits them in a new IRA account 63 days later. Upon audit, the taxpayer learns that he has been misinformed about the required rollover period and that he is liable for additional taxes, penalties and additions to tax for not having redeposited the amount within 60 days.

An offer to compromise a tax liability pursuant to section must be submitted according to the procedures, and in the form and manner, prescribed by the Secretary. An offer to compromise a tax liability must be made in writing, must be signed by the taxpayer under penalty of perjury, and must contain all of the information prescribed or requested by the Secretary.

However, taxpayers submitting offers to compromise liabilities solely on the basis of doubt as to liability will not be required to provide financial statements.

The IRS may not accept for processing any offer to compromise a liability following reference of a case involving such liability to the Department of Justice for prosecution or defense.

If an offer accepted for processing does not contain sufficient information to permit the IRS to evaluate whether the offer should be accepted, the IRS will request that the taxpayer provide the needed additional information. If the taxpayer does not submit the additional information that the IRS has requested within a reasonable time period after such a request , the IRS may return the offer to the taxpayer.

The IRS may also return an offer to compromise a tax liability if it determines that the offer was submitted solely to delay collection or was otherwise nonprocessable. An offer returned following acceptance for processing is deemed pending only for the period between the date the offer is accepted for processing and the date the IRS returns the offer to the taxpayer. See paragraphs f 5 ii and g 4 of this section for rules regarding the effect of such returns of offers.

Compromise with one taxpayer does not extinguish the liability of, nor prevent the IRS from taking action to collect from, any person not named in the offer who is also liable for the tax to which the compromise relates. Neither the taxpayer nor the Government will, following acceptance of an offer to compromise, be permitted to reopen the case except in instances where —. Except as otherwise provided in this paragraph e 6 , if an offer to compromise is accepted, there will be placed on file the opinion of the Chief Counsel for the IRS with respect to such compromise, along with the reasons therefor.

Also placed on file will be a statement of —. The taxpayer may administratively appeal a rejection of an offer to compromise to the IRS Office of Appeals Appeals if, within the day period commencing the day after the date on the letter of rejection, the taxpayer requests such an administrative review in the manner provided by the Secretary.

Where a determination is made to return offer documents because the offer to compromise was nonprocessable, because the taxpayer failed to provide requested information, or because the IRS determined that the offer to compromise was submitted solely for purposes of delay under paragraph d 2 of this section, the return of the offer does not constitute a rejection of the offer for purposes of this provision and does not entitle the taxpayer to appeal the matter to Appeals under the provisions of this paragraph f 5.

However, if the offer is returned because the taxpayer failed to provide requested financial information, the offer will not be returned until a managerial review of the proposed return is completed. The IRS will not levy against the property or rights to property of a taxpayer who submits an offer to compromise, to collect the liability that is the subject of the offer, during the period the offer is pending, for 30 days immediately following the rejection of the offer, and for any period when a timely filed appeal from the rejection is being considered by Appeals.

If, following the rejection of an offer to compromise, the taxpayer makes a good faith revision of that offer and submits the revised offer within 30 days after the date of rejection, the IRS will not levy to collect from the taxpayer the liability that is the subject of the revised offer to compromise while that revised offer is pending. The IRS may levy to collect the liability that is the subject of an offer to compromise during the period the IRS is evaluating whether that offer will be accepted if it determines that collection of the liability is in jeopardy.

If the IRS determines, under paragraph d 2 of this section, that a pending offer did not contain sufficient information to permit evaluation of whether the offer should be accepted, that the offer was submitted solely to delay collection, or that the offer was otherwise nonprocessable, then the IRS may levy to collect the liability that is the subject of that offer at any time after it returns the offer to the taxpayer. Notwithstanding the evaluation and processing of an offer to compromise, the IRS may, in accordance with section , credit any overpayments made by the taxpayer against a liability that is the subject of an offer to compromise and may offset such overpayments against other liabilities owed by the taxpayer to the extent authorized by section Except as otherwise provided in this paragraph g 6 , the IRS will not refer a case to the Department of Justice for the commencement of a proceeding in court, against a person named in a pending offer to compromise, if levy to collect the liability is prohibited by paragraph g 1 of this section.

Without regard to whether a person is named in a pending offer to compromise, however, the IRS may authorize the Department of Justice to file a counterclaim or third-party complaint in a refund action or to join that person in any other proceeding in which liability for the tax that is the subject of the pending offer to compromise may be established or disputed, including a suit against the United States under 28 U.

In addition, the United States may file a claim in any bankruptcy proceeding or insolvency action brought by or against such person. Sums submitted with an offer to compromise a liability or during the pendency of an offer to compromise are considered deposits and will not be applied to the liability until the offer is accepted unless the taxpayer provides written authorization for application of the payments.

If an offer to compromise is withdrawn, is determined to be nonprocessable, or is submitted solely for purposes of delay and returned to the taxpayer , any amount tendered with the offer, including all installments paid on the offer, will be refunded without interest.

If an offer is rejected, any amount tendered with the offer, including all installments paid on the offer, will be refunded, without interest , after the conclusion of any review sought by the taxpayer with Appeals. Refund will not be required if the taxpayer has agreed in writing that amounts tendered pursuant to the offer may be applied to the liability for which the offer was submitted. The statute of limitations on collection will be suspended while levy is prohibited under paragraph g 1 of this section.

For any offer to compromise, the IRS may require, where appropriate, the extension of the statute of limitations on assessment. However, in any case where waiver of the running of the statutory period of limitations on assessment is sought, the taxpayer must be notified of the right to refuse to extend the period of limitations or to limit the extension to particular issues or particular periods of time.

For provisions relating to the inspection of returns and accepted offers to compromise, see section k 1. This section applies to offers to compromise pending on or submitted on or after July 18, United States v.

Donovan , F. United States , F. United States , supra at ; United States v. Lane , F. Commissioner , 52 T. Consequently, an OIC, like certain other agreements between the Commissioner and taxpayers, is governed by general principles of contract law. Duncan v. Commissioner , T.

Commissioner , 92 T. Courts have routinely held that OICs are valid and binding contracts. See Timms v. United States , supra at ; Waller v.

United States , 44 F. United States , 2 F. Supp , Ct. Dutton v. See also Estate of Jones v. Commissioner , F. There may be reasonable exceptions. Need assistance in managing the Tax Compliance process? Freeman Law offers value-driven legal services and provides practical solutions to complex tax issues. Schedule a consultation now or call to discuss your tax concerns and questions? Existing Client? Enter the code:. Jason B. Making the Offer The offer should include all information necessary to verify the grounds for compromise.

Returned Offers If an offer to compromise accepted for processing does not contain sufficient information to permit the Service to evaluate whether the offer should be accepted, the Service will request that the taxpayer provide the needed additional information.

The Service also may return the offer after it has been accepted for processing if: 1 The Service determines that the offer was submitted solely to delay collection; 2 The taxpayer fails to file a return or pay a liability; 3 The taxpayer files for bankruptcy; 4 The offer is no longer processable; or 5 The offer was accepted for processing in error. In doing so, the IRS may, among other steps, review the following documents to determine whether there are undisclosed assets or income and to assist in valuing the property: Divorce decrees or separation agreements to determine the disposition of assets in the property settlements; Homeowners or renters insurance policies and riders to identify high value personal items such as jewelry, antiques, or artwork; Financial statements recently provided to lending institutions or others to identify assets or income that may not have been revealed on the CIS.

Ongoing Businesses For an ongoing business, the IRS may make field calls to validate the existence and value of business assets and inventory.

Net realizable equity is defined as the quick sale value QSV less amounts owed to secured lien holders with priority over the federal tax lien , if applicable, and applicable exemption amounts The QSV is defined as an estimate of the price a seller could get for the asset in a situation where financial pressures motivate the owner to sell in a short period of time, usually 90 calendar days or less.

Jointly Held Assets When taxpayers submit separate offers but have jointly-owned assets, the IRS will generally allocate equity in the assets equally between the owners. Assets Held By Others as Transferees, Nominees, or Alter Egos The IRS will also conduct an investigation to determine what degree of control the taxpayer has over assets and income that are in the possession of others, particularly when the offer will be funded by a third party.

Loans to officers are generally considered an account receivable and valued according to their collectability. If the IRS believes that the taxpayer may be receiving income from loans and that their wages are not reasonable, the IRS may consider a referral to the Examination Division. Life Insurance The IRS will may treat life insurance differently depending upon the type and nature of the insurance policy.

Documentation from a broker may be required to verify the selling price and related expenses. Retirement or Profit-Sharing Plans Funds held in a retirement or profit-sharing plan are considered an asset and must be valued for purposes of the offer in compromise.

The IRS provides for a number of rules based upon the type of account at issue: If… And… Then… The account is an Individual Retirement Account IRA , k , or Keogh Account The taxpayer is not retired or close to retirement Equity is the cash value less any tax consequences for liquidating the account and early withdrawal penalty, if applicable.

The IRS will seek to verify the type of ownership through warranty and mortgage deeds, and may seek to verify or determine the FMV of the property through various sources, including: The value listed on real estate tax assessment statements. Market comparables. Recent purchase prices. An existing contract to sell. Recent appraisals. In order to determine the value of a note receivable, the IRS may consider, among other things, the following: Whether it is secured and if so by what asset s , What is collectible from the borrower, and If it could be successfully levied upon.

Income-Producing Assets When an offer includes business assets, the IRS conducts an analysis to determine if certain assets are essential for the production of income. The IRS will generally use the following procedures when valuing income-producing assets: If… Then… There is no equity in the assets There is no adjustment necessary to the income stream. There is equity and no available income stream i.

There are both equity in assets that are determined to be necessary for the production of income and an available income stream produced by those assets The IRS will compare the value of the income stream produced by the income producing asset s to the equity that is available.

An asset used in the production of income will be liquidated to help fund an offer The IRS may adjust the income to account for the loss of the asset. A taxpayer borrows against an asset that is necessary for the production of income, and devotes the proceeds to the payment of the offer. The IRS may allow the loan payment as an expense and will consider the effect that the loan will have on the future income stream. The following examples provides some guidance with respect to the treatment of equity and income produced by assets: Example: 1 A business depends on a machine to manufacture parts and cannot operate without this machine.

In order to determine the value of business assets, the IRS may use the following: For assets commonly used in many businesses, such as automobiles and trucks, the value may be determined by consulting trade association guides.

For specialized machinery and equipment suitable for only certain applications, the IRS may consult a trade association guide, secure an appraisal from a knowledgeable and impartial dealer, or contact the manufacturer. When the property is unique or difficult to value and no other resource will meet the need, the IRS may utilize the services of an IRS valuation engineer. The IRS may ask the taxpayer to secure an appraisal from a qualified business appraiser. To determine the value of a business as a going concern, the IRS will consider the value of its assets, future income, and intangible assets such as: Ability or reputation of a professional.

Established customer base. Prominent location. Well known trade name, trademark, or telephone number. Possession of government licenses, copyrights, or patents. Dissipation of Assets The inclusion of dissipated assets in the calculation of the reasonable collection potential RCP is no longer applicable, except where it can be shown that the taxpayer sold, transferred, encumbered or otherwise disposed of assets in an attempt to avoid the payment of the tax liability or used the assets or proceeds other than wages, salary, or other income for other than the payment of items necessary for the production of income or the health and welfare of the taxpayer or their family, after the tax has been assessed or during a period of up to six months prior to or after the tax assessment.

Retired Debt Retired debt is considered an expected change in necessary or allowable expenses. If… Then… Income will increase or decrease or current necessary expenses will increase or decrease Adjust the amount or number of payments to what is expected during the appropriate number of months. A taxpayer is temporarily or recently unemployed or underemployed The IRS will generally use the level of income expected if the taxpayer were fully employed and if the potential for employment is apparent.

If there is a verified expectation the taxpayer will be securing employment then the use of anticipated future income may be appropriate. The IRS may use anticipated future income where the future employment is uncertain. However, this does not apply to wage earners.

Calculations for wage earners are generally based on current income unless the taxpayer has unique circumstances.

A taxpayer is in poor health and their ability to continue working is questionable The IRS will generally reduce the number of payments to the appropriate number of months that it is anticipated the taxpayer will continue working.

The IRS will consider special circumstances that may warrant adjustments. If not, the IRS will generally base the calculation on current earnings. Taxpayer is currently receiving overtime. If the overtime is regular and customary, it will generally be included in current income. A taxpayer will file a petition for liquidating bankruptcy Under these circumstances, the IRS may reduce the value of future income.

It will not reduce the total value of future income to an amount less than what could be paid toward non-dischargeable periods, or what could be recovered through bankruptcy, whichever is greater.

Allowable Expenses Allowable expenses consist of necessary and conditional expenses. To qualify for an OIC, the taxpayer must have filed all tax returns, made all required estimated tax payments for the current year, and made all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees. The RCP includes the value that can be realized from the taxpayer's assets, such as real property, automobiles, bank accounts, and other property. In addition to property, the RCP also includes anticipated future income less certain amounts allowed for basic living expenses.

In general, a taxpayer must submit an application fee for the amount stated on Form Don't combine this fee with any other tax payments. However, there are two exceptions to this requirement:. Lump Sum Cash Offer - Taxpayers may choose to pay the offer amount in a lump sum or in installment payments. A "lump sum cash offer" is defined as an offer payable in 5 or fewer installments within 5 or fewer months after the offer is accepted.

If a taxpayer submits a lump sum cash offer, the taxpayer must include with the Form a nonrefundable payment equal to 20 percent of the offer amount. This payment is required in addition to the application fee. The 20 percent payment is generally nonrefundable, meaning it won't be returned to the taxpayer even if the offer is rejected or returned to the taxpayer without acceptance.

Instead, the 20 percent payment will be applied to the taxpayer's tax liability. The taxpayer has a right to specify the particular tax liability to which the IRS will apply the 20 percent payment. Periodic Payment Offer - An offer is called a "periodic payment offer" under the tax law if it's payable in 6 or more monthly installments and within 24 months after the offer is accepted. When submitting a periodic payment offer, the taxpayer must include the first proposed installment payment along with the Form This amount is generally nonrefundable, just like the 20 percent payment required for a lump sum cash offer.

The RCP includes the value that taxpayers can realize from their assets, such as real property, automobiles, bank accounts, and other property. In addition to property, the RCP also includes anticipated future income, less specific amounts allowed for basic living expenses. When submitting an OIC based on doubt as to collectability or based on effective tax administration, taxpayers must use the most current version of Form , Offer in Compromise. Taxpayers may choose to pay the offer amount in a lump sum or installment payments.

Therefore, the proper calculation of the Reasonable Collection Potential is the most important aspect of a favorable outcome an accepted offer at the lowest possible amount. The reasonable collection potential is the amount of money the IRS thinks they can collect from you for your tax debts.