Owe the IRS? How to know if you qualify for relief

Services for Real Estate Pros with IRS Debt-Free, Inc.

If you owe the IRS then you might already know some of the tactics they utilize to try and collect. They can levy your bank account or garnish your wages and at this point they might have already used them to get your attention. As you might have heard the IRS offers several repayment programs as part of their effort to try and collect, yet the most popular is the Offer in Compromise program because it was designed to accept less than the amount owed based on the taxpayers ability to pay and their qualifications. It basically comes down to what the IRS considers to be the taxpayers “Reasonable Collection Potential” and it's based on a special IRS Formula. If you do a little bit of homework and use this formula, you can determine your eligibility be able to save yourself the headache and “money-ache” of possibly paying thousands of dollars to a Tax Relief Firm and going thru the Offer in Compromise process only to quickly find out that you do not qualify.


In an effort to educate my clients and to provide as much information as possible so that anyone with IRS tax debt can determine if they qualify, I’ve laid out a simple calculation to help you do just that. I also highly recommend that you go into the IRS Website and use the Pre-Qualifier Tool and other free resources available to help you as well.

The IRS Formula:

Reasonable Collection Potential (RCP) is based on two sets of calculations:

                                                                     Future Income and Net Equity in Assets.



Future income is calculated by using the taxpayers gross income (before any deductions) minus their “allowable” expenses. The IRS divides expenses into three categories: Actual, National and Local.The ownership of a vehicle for example uses a National Standard to determine the amount you may expense. If you have luxury vehicle for example and your payment is $700 per month, the IRS will only allow $521 (the National Standard) for auto payment as an expense, the surplus will therefore not be deducted as an expense and will be considered additional revenue. You can visit the IRS to get the full lists of allowable expenses. The sum of all monthly income minus the allowable expenses should then be multiplied by 12 months (or 24 months depending on the type of Offer you want to make) to determine the first part of this formula.

Net equity in assets is calculated by first finding the Fair Market Value of the asset; you can use some free resources to gather this information, for Real Estate for example, you can use Zillow and use the “Zestimate” amount as the fair market value amount, you can also use a current Appraisal to the property for better accuracy. The IRS considers that you will sell your assets in order to pay for the pending debt and they allow you a 20% deduction to the asset or what they consider to be a “quick-sale” price, you may also deduct any pending loan balance on the asset to determine the actual available equity in that particular asset. The sum of all available equity in your assets will determine the second part of this formula.


Once you have calculated your future income (multiplied by 12 months) and the net equity in ALL your assets, you can determine what your “Reasonable Collection Potential” actually is. If the total of this calculation exceeds the amount due, then the Offer in Compromise program will not be possibility for you but you may be eligible for a settlement agreement and you may pay the balance due in monthly installments. If, however, this calculation is lower than the amount due you are able to use this amount as your offer amount. Please note that several variables come into play when calculating this but this is its most basic breakdown and one that will give you a pretty good idea of your eligibility.

If you are interested in learning more and digging a little deeper, please visit www.irsdebt-free.com and register for a FREE WEBINAR where go through this process together. Are you ready to become IRS-Debt Free?

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