How the RCP Formula Works – Part 2

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.

 

My previous post covered the first part of the formula which calculates the value of property owned. Today, I will cover the second part which is based on future income. This is not future income for the rest of the taxpayer’s life. Rather it’s the expected cash flow over the remaining period of time that the IRS has to collect before the Statute of Limitations runs out.

It all starts with monthly gross income from all sources to include wages, business income, social security, pensions, alimony, child support, etc. This is about cash flow and the labels of taxable and nontaxable are not applicable. The IRS is going to want to look at this from a household point of view. Also, when it comes to wages, the IRS is going to use the gross income numbers and not the cash take-home pay.

Now comes the hard part – how much does it cost the taxpayer for living expenses. Mostly this is done with tables that can be summarized as follows:

 

Class

Actual or Allowable

Housing & Utilities

Lessor of Actual or Local Standard Table

Food, Clothing and Misc.

National Standard Table

Auto Ownership

Lessor of Actual or National Standard

Auto Operating Costs

Local Standard

Public Transportation

National Standard

Health Insurance

Actual

Out-of-Pocket Health Care Costs

Higher of Actual or National Standard

Court Ordered Payments

Actual

Child Care Payments

Actual

Life Insurance

Actual Reasonable Costs

Current Year Taxes

Actual

Secured Debts

Actual

Delinquent State Taxes

Percentage of State v. Federal

 

The totals from the various categories are then added up and then deducted from cash inflow number to come up with a monthly free cash flow amount. This number is then multiplied by the number of months remaining in the Statute of Limitations. Finally, this result is added to the asset sale number (previous post) to come up with the Reasonable Collection Potential Amount.

 

My next post will cover some strategy ideas for getting the best results from the RCP formula.

 

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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I have been such a thing about 10 years ago, its painful dealing with IRS

IES counts monthly gross income from all sources to include wages, business income, social security, pensions, alimony, child support, etc. This is about cash flow and the labels of taxable and nontaxable are not applicable. The IRS is going to want to look at this from a household point of view. Also, when it comes to wages, the IRS is going to use the gross income numbers and not the cash take-home pay.

Aug 26, 2019 04:28 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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