IRS Offers in Compromise
The RCP Value Must First Be Determined
It is important to realize that this offer procedure with the IRS is entirely discretionary and is based on the
“RCP” or reasonable collection potential of each individual taxpayer (True economic Status). This is simply the net realizable
value of all your assets plus your future income (less necessary living expenses) for the payback
period. The net realizable value is the quick sale value of your assets (usually 80% of fair market
value) less the liabilities attaching to the property.
Generally, an offer will not be accepted for less than your RCP amount, and you will be required
to submit a financial disclosure (form 433) with the OIC (form 656). The 433 will be investigated by
the IRS before the OIC is accepted.
There is no magical free ride here, where your liability is going to be reduced if you have the ability to full pay: the correct calculation of your RCP value is key.
Two Types of Offers
There are basically two types of payment based offers, lump sum and periodic payment.
Interestingly, the lump sum can be made up of 5 or less monthly payments and the other, 6 or more. With
the lump sum offer, you will be required to place 20% of your offer as a deposit (TIPRA) on your liability when
your offer is submitted. Low income taxpayers may qualify for a waiver of this TIPRA payment. The deposit for the periodic payment offer is much lower, which is usually
the first installment on your offer. There is no law that specifies the structure of the payments,
except for the initial payment.
The acceptance of this payment plan is discretionary with the IRS
and will be based on a case by case basis, relating to your specific financial situation.
There are several exceptions to the general rule, relating to special circumstances in the interest
of effective tax administration, that may apply to your specific case.
New Fresh Start Initiative
IRS Information Release (IR 2012-53) describes some of the Fresh Start Initiative's affects on the OIC program. When the RCP is calculated for lump sum offers, the IRS will only look at one year of future income if the offer is to be paid in 5 or fewer months, and two years of income if the offer is to be paid in 6 to 24 months. Accordingly, all offers must be paid within 24 months.
A new category of Miscellaneous expenses has been added to the national Standards to allow for credit card payments and bank fees and charges. Payments for loans guaranteed by the Federal Government for post high school education and partial payments for state and local taxes may also be allowed in the RCP calculations.
If Your Offer Gets Denied
So, what happens if the IRS denies your offer? The Service will keep your TIPRA payment and send you a rejection notice. How long can they take to notify you? Two years. Yes, the law says that if the IRS does not notify you of a rejection within two years, the offer is deemed to be accepted. The catch, you have to make all the contracted payments, just as if the IRS had accepted your offer until you find out through the notification process.The 24-month mandatory acceptance period provided for in IRC 7122(f) ends when Collection rejects or returns the offer, or the offer is withdrawn.
Therefore, it is important to only file offers that have a good chance of being accepted, or you will just be wasting your time and money.