How Does the Government Evaluate Offers in Compromise?

How Does the Government Evaluate Offers in Compromise? That's a good question so the government evaluates offers and compromises based on what a tax payers reasonable collection potential is so remember an offer and compromise is an agreement between the taxpayer and the government to forgive a past tax liability in exchange for future compliance the government isn't like forget about the liability the government wants to make sure that the offer it's getting from the taxpayer is fair to the government so the government uses a formula called reasonable collection potential to determine that formula and the way reasonable collection potential works is the government looks at the taxpayers current situation it projects a period of time between the state and federal government they do it slightly differently but the question essentially is okay john's taxpayer is submitting an offer of compromise how much could we reasonably collect from john over the next five years and is that amount equal or lower than what God is offering compromises so you see how it works they're taking a five-year period they're saying how much can we get out guy and that amount is equal to or less than the amount of the offer then the government is inclined to take the offer so reasonable collection potential breaks down like this.

A reasonable collection potential RCP is equal to the quick sale value any assets that the taxpayer has plus income minus expenses over that period of time so starting with the asset part of it they'll take all the taxpayers asset and I'll say if the taxpayer were to liquidate their assets that's what quick sale value is one of the liquidation value of all the taxpayers assets as of today then they'll take that number okay whatever that number is and then you add that to what's the variance between the income and expenses reasonable living expenses for the taxpayer over the next five years 60 months so if the taxpayer if the difference between the taxpayers income and expenses is a hundred dollars over sixty months six grand if it's five hundred dollars over sixty months that's 30 grand so as you can see the reason a lot of offer and compromise get rejected number one the taxpayer has sufficient assets which are way above it's what the taxpayer is offering but number two it's the difference between the income and expenses on that side of things so that's the calculation of the government's running and actually if you go through the offer and compromise process when the government comes back to you and either accepts your offer presents a counteroffer or rejects it they have these little tables that they use and they break down all your assets on a table and they break down the income that you have on a table and the expenses you have on a team so when we do an offer compromise and we're negotiating we're looking at this table to see how the government is calculating what the reasonable collection potential is so that in a nutshell is how offers and compromise are evaluated and depending on the variables that you put into that formula you'll get different results.


Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law