If a taxpayer wishes to submit an offer in compromise on the basis of doubt as to collectability, they will need to show the IRS:
1. It is unlikely that the tax liability can be collected in full
2. The amount offered in satisfaction of the liability reflects the reasonable collection potential
Without proving these two points to the IRS, it is likely that an offer will be denied on the basis of doubt as to collectability. Reasonable collection potential can be defined as the amount that can be collected from all available means, including administrative and judicial collection remedies.
Reasonable Collection Potential
The IRS considers to reasonable collection potential to be the fill amount of equity in the taxpayer’s assets. This amount includes their IRAs and other retirement funds plus a multiple of the taxpayer’s excess monthly income over allowable expenses.
The IRS generally has a very strict view in regard to what is considered an allowable expense. The IRS will only consider expenses that are necessary for the production of income or for health needs. Any expense regarding unsecured debt and luxury items will be disregarded and not allowed by the IRS.
Once the net monthly excess amount of income over expenses has been determined, that amount will be multiplied by:
1. “48” if the amount will be paid within five months
2. “60” if the amount will be paid in installments over more than 5 months
3. The remaining months before the statue of limitations will expire if that timeframe is shorter than the amount of time listed above.
Here is an example of how this would be calculated:
James has cash of $200, a bank account balance of $500, and his excess monthly income is $100. James wants to offer a lump sum payment, the reasonable collection potential is $5,500 ($200 + $500 + [48 x $100]). If James decides that he wants to pay in installments over more than 5 months, the amount would be $6,700 ($200 + $500 + [60x $100]).
Careful Calculation of Offer
It is important that a taxpayer take their time when calculating the amount to offer when they are submitting on the basis of doubt as to collectability. The taxpayer must show strong support for the offer they are proposing or the IRS will likely reject their offer.
In the event the IRS rejects your offer in compromise on the basis of doubt as to collectability, it is likely due to the fact that the IRS believes based on their verified information, that the reasonable collection potential is more than that offered.