Understanding the IRS’s perspective is key when negotiating a tax debt exceeding $100,000. Using the Reasonable Collection Potential (RCP) formula, they evaluate your ability to pay. Centering your strategy on this formula improves your chances of a favorable resolution.
WHAT IS THE RCP?
The RCP measures how much the IRS believes it can collect from you based on:
- Net Equity in Assets: Includes cash, real estate, vehicles, and other valuables.
- Future Income: Disposable income after allowable expenses.
This calculation determines your eligibility for programs like an Offer in Compromise (OIC) or an Installment Agreement.
Preparing for Negotiation
- Calculate Your Assets and Equity
Review all assets and liabilities. Subtract secured debts to find net equity.
- Quick Sale Discount: The IRS applies a 20% discount to hard assets (e.g., real estate, vehicles) to reflect distressed sale values. Liquid assets like cash are valued at the full amount.
- Assess Income and Expenses
Determine your monthly disposable income. The IRS uses strict guidelines (Collection Financial Standards) for allowable expenses like housing and food.
- Tip: If your actual expenses exceed these limits, be prepared to justify them with documentation.
- Lower Your RCP
- Document Hardships: Highlight expenses like medical bills or dependent care.
- Non-Liquid Assets: Show why selling certain assets would create hardship.
- Maximize Allowable Expenses: Claim every permissible expense under IRS standards.
Applying RCP to Resolution Options
- Offer in Compromise (OIC): The IRS won’t accept offers below your RCP. Pursuing an offer if your RCP shows you can full-pay wastes time and money.
- Installment Agreements: Monthly payments depend on your disposable income. Lower RCP means smaller payments.
- Currently Not Collectible (CNC): If you can’t pay, the IRS may temporarily halt collection efforts.
Final Tips
- Provide Accurate Documentation: Support claims with bank statements, bills, and pay stubs.
- Be Transparent: Misleading information can damage your credibility.
- Seek Professional Help: Tax professionals can navigate RCP nuances and build a strong case.
Conclusion
Focusing on the RCP formula is essential when resolving tax debts over $100,000. By understanding how the IRS evaluates your financial situation, you can strategically reduce your liability and work toward a resolution. With preparation and guidance, you can regain control of your tax debt.
