How the IRS RCP Formula Works – Part 1

By
Services for Real Estate Pros with Backoffice Squared

I represent taxpayers in Gainesville and the state of Florida who have tax issues with the IRS and Florida Department of Revenue. The IRS Offer-in-Compromise is an agreement to clear a tax debt for less than its face value. How many dollars is the IRS willing to compromise on depends upon a formula. This formula is called the “Reasonable Collection Potential” or RCP for short.

 

The formula is based on two ideas – first, that a taxpayer might have equity built up in assets that they currently own which could be paid over to cover the debt. And secondly, the taxpayer will have future earnings, a portion of which, could also be used to cover the debt. The total of these two amounts is the RCP amount that the IRS wants as a minimum in any Offer-in-Compromise.

 

This blog post will detail the part of the RCP formula dealing with a taxpayer’s current equity. The IRS is interested in the assets that you own that are either cash or could be turned into cash and paid over to them such as:

  •          Cash in bank or under a mattress
  •          Investment accounts including retirement accounts
  •          Cash value of life insurance
  •          Real estate such as your personal residence
  •          Vehicles
  •          Collectables such as artwork or that 1942 Sherman Tank that seemed like a good at one time

Non-cash assets must first be valued. An easy starting point for real estate is Zillow for houses or Kelly Blue Book for vehicles. The IRS then reduces that value by 20% in order to come to the “quick sale” value. Next, any lender claims against that asset are subtracted to leave the balance that the IRS can reasonably expect to be theirs.

 

Knowing that the IRS is closing in on them, some taxpayers will try to get the jump and liquidate some of their assets and either hide the cash or use it to pay some other higher priority debt. Maybe they will sell off some stocks and use the cash to invest in their brother-in-law’s business. Not a great idea. The IRS has seen all these tricks and will look back for 3 tax years to search for these sales. Any amounts that could have been paid over to them will be added to the RCP amount when it comes to accepting an Offer-in-Compromise. Naturally, the taxpayer’s credibility with the IRS will decline making a deal just that much harder to get accepted.

 

My next post will cover the future earnings part of the formula.

 

If you can show that you are in compliance and that you don’t have the potential to full-pay, an Offer-in-Compromise becomes a viable option. The amount you offer must be in the area of the amount calculated with the RCP formula. Generally, the IRS requires that a check for 20% of the offer price be included with the offer plus the Offer fee of $186. If the offer is accepted, the balance is due within the next five months.

 

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@backoffice2.net.

 

Jim Payne, CPA

Backoffice2

Gainesville, FL

Cell (352) 317-5692

Office (352) 376-9401

Fax (352) 376-9440

jim@backoffice2.net

https://backoffice2.net

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Rainer
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Sham Reddy CRS
H E R Realty, Dayton, OH - Dayton, OH
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Great information, thanks for sharing!

The IRS Offer-in-Compromise is an agreement to clear a tax debt for less than its face value. How many dollars is the IRS willing to compromise on depends upon a formula. This formula is called the “Reasonable Collection Potential” or RCP for short.

Aug 21, 2019 04:01 AM #1
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Rainmaker
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Jim Payne, CPA

CPA firm practicing in the area of IRS Collections
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