What is a Reasonable Collection Potential of an Offer in Compromise?
This is the sum of money that the IRS thinks you are able to pay given your current financial status. A calculation of the reasonable collection potential is based on the value of your assets and your monthly disposable income. Typically this is based on the last four or five years.
An accurate calculation of your potential is crucial to the chances of your offer being accepted because of the following:
- Your offer of money to the IRS must be equal to or greater than your reasonable collection potential.
- You might not be eligible if your potential is equal to or greater than your tax debts.
Calculating the Reasonable Collection Potential
A simple formula is applied to calculate the reasonable collection potential. This value is equal to the sum of the entire amount of receivable cash. This includes your investments and accounts, and realized value of your personal assets. Your personal assets are real estate properties, vehicles, and your monthly disposable income.
The “realizable value” of your assets is calculated using the following formula:
- (the fair market value of your asset) * (80% of the quick sale discount factor) – (the amount left over from any loans secured by the property).
Meanwhile, your monthly disposable income should be prepared by your tax consultant (in Section 9 of Form 433-A). An astute tax consultant, while calculating this value will advise you to use the minimum value of your actual expenses. Afterwards, you must find your monthly disposable income by subtracting your living expenses from your income.
The value of your total monthly expenses has the potential to make or break your chances of the offer being accepted. Therefore, it’s paramount that you include all the details of your expenses to make a strong case.
If you intend to pay your Offer within 90 days of approval, then you need to multiply the value of your disposable income by 48 months or 60 months. Remember that, in the latter instance, you will still need to pay the full amount within 24 months.
With your reasonable collection potential, you can specify the Total Offer Amount in Form 656. And submit this offer for review by a tax professional before sending it to the IRS.