This blog is the third in a series on how the IRS determines how much (and whether) a taxpayer can repay their tax debts.
The calculation is based upon a concept called “Reasonable Collection Potential”, or “RCP” which looks at a taxpayer’s assets, future income and allowable living expenses in order to determine this. Over the past two weeks I went into detail on the asset and living expense side of the calculation. This week I am going to speak about the taxpayer’s “Future Income”.
My firm, By The Book Taxes, located in Norwalk, CT specializes in income tax preparation for individuals, families and self-employed people. By the Book Taxes also helps clients resolve their tax debts by preparing and filing Installment Payment Agreements, Offer(s)-in-Compromise, Currently Not Collectible and Innocent/Injured Spouse applications.
The most important thing to realize about the “Future Income” calculation is that it is not just a calculation of your net take home pay each month, but rather a cash flow analysis to see how much cash from all sources you receive on a monthly basis.
The types of items the IRS look for include*:
- W-2 wages
- Net business income (from self-employment)
- Net rental income (investment rental property)
- Social Security
- Pension and Retirement (IRA/401k)
- Investment income (interest, dividends and capital gains)
- Child Support
Once the IRS has determined the “gross” amount of cash coming into the household, it then determines, based upon the “allowable living expense” calculation, the amount of funds that are leftover each month and available to pay past due tax balances.
Before being considered a candidate for an Offer-in-Compromise, it must be determined if the taxpayer has enough “net equity in assets” and “future income” to repay the tax debt in full before the statutory collection date expires (ten years from assessment).
Take the monthly net “future income” and multiply it by the number of months remaining on the collection statute. Add that to the “net equity in assets”. If the total is greater than the tax debt then the taxpayer can repay in full and should get on an Installment Payment Agreement with the IRS.
If they can’t repay in full they should consider filing an Offer-in-Compromise where their offer number equals their “net equity in assets” plus 12 months of net “future income”.
If you have years of unfiled tax returns or need help getting a tax debt resolved, please call or email me. I can help.
*The Accountant’s Guide to Resolving Tax Debts by Eric L. Green, page 23