09 July 2020

How much do I Offer the IRS?

I get this question a lot. “I owe, $125,000, how much do I OFFER the IRS?” This is a trickier question then it may appear.

Let’s break it down. First, the amount you owe is only loosely related to your Offer amount. It comes into play with the first test, “Can your debt be paid-off with monthly payments before it expires?” If the answer is YES, your Offer is dead in the water.

How does the IRS come up with an acceptable Offer amount? The answer is, Reasonable Collection Potential (RCP).

Here is how your Reasonable Collection Potential is calculated.

Net Realizable Assets (NRA), plus 12 or 24 months of your Remaining Monthly Income. That’s it. That is your RCP and therefore the amount of your Offer.

The tricky part is understanding the IRS rules.

Net Realizable Assets:

Here are some examples of common assets:

Bank Accounts, checking/savings: The IRS will allow you to keep $1,000 and one month of living expenses. Everything above that goes to your NRA. Not less than $0.

Vehicles: You can keep $3,450 of the equity in one vehicle (two if married). All other vehicle equity goes to your NRA.

Most other assets will be calculated by taking 80% of their value, less loans and taxes, to determine the amount that goes to your NRA.

Remaining Monthly Income:

The second factor is your Remaining Monthly Income (RMI). To determine your RMI start with every dollar that comes into the household. This is your income. Now calculate your Allowable expenses as determined by IRS guidelines.

The amount that your income exceeds your allowable expenses is you RMI. Not less than $0.

There are two ways the RMI is multiplied. Use a multiplier of 12 if you are making a Lump Sum Offer. Or, use a multiple of 24 if you are making a Periodic Payment offer.

Quick Example, single taxpayer:

Cash in Bank = $2,400

Truck, FMV $8,000 no loan

Boat, FMV $4,000 no loan

RV Camp Trailer, FMV $20,000, loan amount $13,000

Household Monthly Income: $6,000

IRS Allowable Expenses: $5,700

Net Realizable Assets:

Cash: $2,400 minus $1,000 = $1,400 minus one month’s expenses $5,700 = zero. (Remember, the value can not be less than zero.)

Truck: $8,000 X 80% = $6,400 minus $3,450 = $2,950 NRA

Boat: $4,000 X 80% = $3,200 NRA

RV Camp Trailer: $20,000 X 80% = $16,000 minus loan $13,000 = $3,000 NRA