Ever see those late night television commercials where the hysterical announcer yells, “If you owe the IRS more than $10,000, call this 800 number right away”?

And then at the end a satisfied client says, “I owed the IRS $400,000 and settled for $850 thanks to the firm of Cheatem, Billem and Leeve, CPA”.

What they are talking about are “Offers-in-Compromise” or OIC in IRS lingo where a taxpayer may settle their debts with the IRS for less than the total amount owed.

It is important to know that the IRS turns down about two (2) out of every three (3) offers it receives from taxpayers.

This is because most tax professionals (except for the elite few) understand how the OIC formula works. There is no magic here. It is a straight arithmetic calculation used to arrive at a number called Reasonable Collection Potential or “RCP”.

RCP is the sum of two sets of numbers:

• Net Equity in assets plus
• Future income

Net equity of assets is the value of your assets like cash in the bank, investment accounts, retirement accounts, cash value of life insurance, collectibles such as art or jewelry, real estate (less mortgages) and vehicles like cars or boats (less loans).
For the assets with a loan against them, take a value of 80% of FMV (quick sale ratio) less the loan or mortgage. The excess is equity. Add the value of all your “net” assets up and that’s your equity in assets.

Future income is the excess of all cash that comes to you in a month (from all sources) less your allowable living expenses (as determined by the Bureau of Labor Statistics). This is a cash flow calculation not a taxable income calculation. Multiply that excess by twelve (12) to represent a year of free cash. Add that figure to the net equity in assets. That’s what the IRS will settle for.

If your calculation of these two items exceeds the amount you owe the IRS, they won’t settle. If it does, the odds are they will. So get a good night sleep and turn off the TV.