Tax Seminar #3 – December 3 2012

Reduced Offers Examples:
One of the most significant changes is the multiple to be used by the IRS in computing the
Future Net Income component of Reasonable Collection Potential (“RCP”). The following
examples illustrate that policy change with respect to offers paid within five months of
acceptance, wherein the multiple is reduced from 48 to 12.
Example #1:
• Taxpayer owes $125,000 to the IRS
• Taxpayer earns $80,000 per year.
• We agree with IRS that the Taxpayer can afford to pay $750 per month to the
IRS.
• We agree with the IRS that the Taxpayer has $40,000 in realizable value of
his/her assets.
Under the old rules the acceptable offer (RCP) would have been $76,000, computed by
multiplying the $750 by 48 ($36,000) and adding the $40,000.
Under the new rules the acceptable offer (RCP) will now be $49,000, computed by
multiplying the $750 by 12 ($9,000) and adding the $40,000.
Example #2:
• Taxpayer owes $400,000 to the IRS
• Taxpayer earns $250,000 per year.
• We agree with IRS that the Taxpayer can afford to pay $4,000 per month to the
IRS.
• We agree with the IRS that the Taxpayer has $5,000 in realizable value of his/her
assets.
Under the old rules the acceptable offer (RCP) would have been $197,000, computed by
multiplying the $4,000 by 48 ($192,000) and adding the $5,000.
Under the new rules the acceptable offer (RCP) will now be $53,000, computed by
multiplying the $4,000 by 12 ($48,000) and adding the $5,000.
The result in this example #2 appears too good to be true. And, although on the face of
the matter, the computations work, the IRS is likely to use its general rule that the
acceptance of the offer would “not be in the best interests of the government” as a reason
for rejecting such an offer.
In addition, if the full payment of the tax can be made within the statute of limitations to
collect the tax (usually ten years from the filing of the return), then the offer will be rejected. So,
in example #2, if the remaining time on the statute to collect the tax is 100 months or more, the
offer will be rejected as the Taxpayer could pay the entire tax over the 100 months ($4,000 times
100 months equals $400,000, which is the tax due).
Each case will be considered based upon its own individual facts and circumstances.
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