Offers in Compromise and Decreasing Your Tax Bill

Posted by: Brookside Admin

For many individuals across the country, the tax bill they're left with at the end of the year exceeds what they're reasonably able to pay. In these situations, the IRS is willing to negotiate down from the total tax payment due based on the figures used in your tax return to a more realistic amount based on one's income and expenses each month. As Stephen Dunn reports for Forbes, these 'offers in compromise' were changed last year so that more taxpayers could take advantage of them and the IRS could collect some payment under circumstances where they'd previously receive nothing. 

  • Reasonable collection potential (RCP)

The basics of the offer in compromise program is that a taxpayer can make an offer of a discounted amount of their tax bill. Whether or not this offer is accepted by the IRS is decided by factoring the net realizable equity of the individual's assets and their reasonable collection potential, or RCP. The RCP in the past was figured by finding the difference in total monthly income and monthly expenses. The expenses aren't actual, however. Instead, the IRS uses national and local standards for the costs of essentials like food, transportation and housing. The monthly excess an individual is found to have is was then multiplied by 60 to reach a total amount they were realistically expected to be able to pay over a 5 year period. Because of the long payment period, taxpayers needed extremely high tax bills to have their offers of compromise accepted. 

Now, the IRS no longer accepts any payment period longer than 24-months. For offers that can be repaid in 5-months or less, the excess monthly income is multiplied by 12. For offers paid in 6 to 24-months, the excess monthly income is multiplied by 24. This makes the program much more effective in granting taxpayers a more realistic tax bill. 

  • Net realizable equity (NRE)

In addition to RCP, the other half of the offer in compromise equation is a taxpayer's NRE. This, in basic terms, is the value of assets when sold in a relatively short amount of time, which is usually defined as less than 90-days. That is usually calculated as 80-percent of fair market value. There are exemption amounts that contribute to the NRE, as well. For example, money in a retirement account or profit sharing plan could be figured into the NRE unless the taxpayer has no ability to access it, it can't be borrowed upon and the taxpayer isn't eligible to retire within the proposed payment period. There are also multiple vehicle deductions, such as money deducted from the value of a vehicle used to get to and from work and another deduction for older vehicles. Proving that additional expenses are needed for the health and wellbeing of the taxpayer or their family can also in a reduced NRE. 

Accurately calculating an acceptable offer in compromise can be complicated, but it is essential in decreasing the amount of taxes owed. At Brown Kinion and Company, our experienced CPAs are available to help you make sense of your tax bill and find what options are available to you. Call us today