How Much Does the IRS Expect Me to Pay on My Back Taxes? Calculating Reasonable Collection Potential
Updated: Jun 22
If you have back tax debt and wish to establish an Installment Agreement, how do you determine how much to pay or how much the IRS will accept? If you apply for an Offer-In-Compromise, how do you know how much to offer? Offering the appropriate amount will significantly help the chances your offer gets accepted. An experienced Tax Debt Resolution Specialist can help you answer these questions.
The IRS uses a formula called Reasonable Collection Potential (RCP) to determine how much they expect you to pay. This is how much the IRS deems you can reasonably pay based on your financial situation. The same formula is used whether applying for an Installment Agreement or filing for an Offer-in-Compromise.
Reasonable Collection Potential (RCP) takes into account your income, your expenses, and your net equity in assets. It is important to note that the IRS will not necessarily allow you to claim your actual expenses. Certain expenses have national standards or local standards according to guidance published by the IRS (standards are updated annually). For example, there is a local standard for housing and utilities based on family size and where you live in the country. When calculating the RCP for housing, the IRS will allow the lesser of actual expenses or the local standard amount. There is a national standard for food, clothing and miscellaneous items as well as a national standard for automobile ownership expenses.
It is also important to note that your ability to pay for IRS purposes is not based on taxable income but rather cash-flow from all sources. For example, sources such as child support payments, alimony, non-taxable portion of social security, dividends and interest, and pension distributions to name a few are all included in the calculation of your RCP.
What is net equity in assets? Think about it like this. What would the IRS get if it foreclosed its lien, sold everything at quick sale value (80%), paid off any loan ahead of its lien and took the net equity? That is the RCP for the assets the IRS would expect. Essentially, the IRS expects you to sell some assets in order to pay back your tax debt.
Why is RCP important and how is it used? Let’s say you are presenting an Offer-in-Compromise to settle your tax debt for less than the total amount you owe. The IRS will use RCP to determine how much they can collect from you. If the IRS determines you are able to pay the entire amount of your tax debt (i.e. you can “full-pay”), your Offer-in-Compromise will be denied. Depending on which type of offer you are applying for, the IRS will use either one or two years of future income plus your net equity in assets to determine your RCP. A tax professional who clearly understands the IRS rules, expense standards, future income, and net equity in assets can properly calculate your RCP, and will greatly improve your chances for a successful resolution of your tax issue.
At Tax Debt Resolution Services of Winchester VA, our mission is to help you eliminate your IRS issues and the stress the IRS has created in your life and help you get back to doing what you do best! We help our clients in Winchester VA, Strasburg VA, Martinsburg WV and Charles Town WV to resolve their tax debts!. If you need assistance please feel free to contact me at 540-662-4432 or email@example.com.
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