The Offer in Compromise program from the IRS is not the automatic "pennies on the dollar" program that TV and radio ads and slick telemarketing salesmen want you to think it is. The Offer in Compromise program is a program where not everybody is eligible. In fact, chances are pretty good that you are NOT eligible for the program.
Why is this?
It's really pretty simple: If the amount you owe in back taxes, penalties, and interest is LESS than the amount the IRS determines you can pay by THEIR formula, then you are not eligible. Period. Case closed. End of story. That's the law. Anybody telling you something different doesn't know what they're talking about.
The amount the IRS determines you can pay based on their formula is called the Reasonable Collection Potential (RCP), and in most cases it is anything BUT reasonable. Here's how the RCP is calculated. Follow this and it will become clear why the RCP isn't exactly "reasonable".
Let's say you run a small plumbing shop with 5 or 6 employees. Times have been hard and have required you to make difficult Credit0 decisions, so as a result you quit paying your employment taxes last year, and now you've racked up $65,000 in tax, penalty, and interest charges that you owe the IRS. I'm making up this particular scenario, but this is fairly representative of about half of all clients we work with.
Let's first look at the assets. Let's say that you rent your shop, have about $5,000 in tools and another $5,000 in spare parts laying around. Your biggest assets are three old service trucks, each worth about $5,000. So all told, this is $25,000 in assets. The IRS takes this value and takes off 20%, in order to represent the "quick sale" value (e.g., discounting the price in order to sell it faster). This leaves $20,000 as the net realizable value of your assets.
Now, let's look at your income. Your accountant gives you a Profit and Loss Statement showing all your revenue for the first 6 months of this year, and also all your expenses. It's been an OK year, and you're plugging along, making a small profit. The bottom line on the P&L shows $12,000 in net profit for the business. That's $2,000 per month.
The next part is where it starts to get a little tricky. Even though an Offer in Compromise is often thought of as being all cash that you have to come up with on the spot, that's not true. The IRS actually gives you three different options for paying your Offer amount:
- Pay it off within 5 months of Offer acceptance.
- Pay it off in more than 5 months but less than 24 months.
- Pay it off in more than 24 months.
For option 2, multiply your monthly net profit by 60.
For option 3, multiply your monthly net profit by the number of months left until your statute of limitations for collection of the Credit7 runs out.
For our example, let's assume there are 8 years left until the statute of limitations expires. Therefore, the income side of your RCP is either $96k, $120k, or $192,000.
Add this amount to the asset value of $20,000, and there you have your offer amount.
See how much of a difference making a profit makes in your RCP? Your net profit is often the single biggest factor in determining how much your Offer in Compromise is.
Let's look at this from a different angle. Let's say that you get the Profit and Loss statement from your accountant or bookkeeper, and it shows that you've LOST $12,000 so far this year. What becomes your Offer amount? Simply the value of your assets, since there is no monthly net profit to multiply by the 48 or 60 months. Thus, your offer amount becomes just $20,000, and THAT is about 31 cents on the dollar in this example.
So what's the biggest lesson to take away from this? The bottom line is this: If you are considering filing for an Offer in Compromise, do it when your business is losing money. If your tax issues are personal income taxes instead of business taxes, then file your Offer in Compromise when you're unemployed.
I hope this has been helpful in clarifying how on Earth the IRS comes up with the numbers they do.
The Offer in Compromise program from the IRS is not the automatic "pennies on the dollar" program that TV and radio ads and slick telemarketing salesmen want you to think it is. The Offer in Compromise program is a program where not everybody is eligible. In fact, chances are pretty good that you are NOT eligible for the program.
Why is this?
It's really pretty simple: If the amount you owe in back taxes, penalties, and interest is LESS than the amount the IRS determines you can pay by THEIR formula, then you are not eligible. Period. Case closed. End of story. That's the law. Anybody telling you something different doesn't know what they're talking about.
The amount the IRS determines you can pay based on their formula is called the Reasonable Collection Potential (RCP), and in most cases it is anything BUT reasonable. Here's how the RCP is calculated. Follow this and it will become clear why the RCP isn't exactly "reasonable".
Let's say you run a small plumbing shop with 5 or 6 employees. Times have been hard and have required you to make difficult Credit0 decisions, so as a result you quit paying your employment taxes last year, and now you've racked up $65,000 in tax, penalty, and interest charges that you owe the IRS. I'm making up this particular scenario, but this is fairly representative of about half of all clients we work with.
Let's first look at the assets. Let's say that you rent your shop, have about $5,000 in tools and another $5,000 in spare parts laying around. Your biggest assets are three old service trucks, each worth about $5,000. So all told, this is $25,000 in assets. The IRS takes this value and takes off 20%, in order to represent the "quick sale" value (e.g., discounting the price in order to sell it faster). This leaves $20,000 as the net realizable value of your assets.
Now, let's look at your income. Your accountant gives you a Profit and Loss Statement showing all your revenue for the first 6 months of this year, and also all your expenses. It's been an OK year, and you're plugging along, making a small profit. The bottom line on the P&L shows $12,000 in net profit for the business. That's $2,000 per month.
The next part is where it starts to get a little tricky. Even though an Offer in Compromise is often thought of as being all cash that you have to come up with on the spot, that's not true. The IRS actually gives you three different options for paying your Offer amount:
- Pay it off within 5 months of Offer acceptance.
- Pay it off in more than 5 months but less than 24 months.
- Pay it off in more than 24 months.
For option 2, multiply your monthly net profit by 60.
For option 3, multiply your monthly net profit by the number of months left until your statute of limitations for collection of the Credit7 runs out.
For our example, let's assume there are 8 years left until the statute of limitations expires. Therefore, the income side of your RCP is either $96k, $120k, or $192,000.
Add this amount to the asset value of $20,000, and there you have your offer amount.
See how much of a difference making a profit makes in your RCP? Your net profit is often the single biggest factor in determining how much your Offer in Compromise is.
Let's look at this from a different angle. Let's say that you get the Profit and Loss statement from your accountant or bookkeeper, and it shows that you've LOST $12,000 so far this year. What becomes your Offer amount? Simply the value of your assets, since there is no monthly net profit to multiply by the 48 or 60 months. Thus, your offer amount becomes just $20,000, and THAT is about 31 cents on the dollar in this example.
So what's the biggest lesson to take away from this? The bottom line is this: If you are considering filing for an Offer in Compromise, do it when your business is losing money. If your tax issues are personal income taxes instead of business taxes, then file your Offer in Compromise when you're unemployed.
I hope this has been helpful in clarifying how on Earth the IRS comes up with the numbers they do.
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