Super-secret RCP reduction tip for Offers in Compromise

I know you’d rather hear about marketing, but I have something that could be of benefit to your clients that I want you to know about.

Based on recent conversations with a few tax practitioners, there is apparently a super-secret method for reducing the Reasonable Collection Potential calculated for an Offer in Compromise. I’m calling it “super-secret” because nobody I’ve been talking to about it so far has noticed it. It’s a method that is hiding in broad daylight, because it’s actually printed right on the Form 656.

One of the elements of the Fresh Start changes that the IRS didn’t make a big deal about in the media was that, for the third time in 18 months, they decided to slightly alter the Offer in Compromise payment options. They reverted to the “Lump Sum Cash” and “Periodic Payment” naming conventions that existed a couple years ago, but made the payment terms for the Lump Sum Cash offer much more clear.

You’re probably already aware that the remaining income multiplier was reduced from 48/60 down to 12/24. If the Offer in Compromise will be paid in full within 5 months of acceptance, the multiplier is 12, otherwise it’s 24 months. You’re probably also aware that it’s currently taking about seven months for an Offer Examiner to be assigned, plus another month or two for the Offer to be processed and accepted.

This gives your client nearly 9 months to get their finances straightened out. More than enough time to figure out how to come up with the Offer money and put it aside. In fact, they can have even more time. After acceptance, the Offer doesn’t need to be paid over the course of 5 months, it needs to be fully paid within 5 months, in order to qualify for the 12 month multiplier.

See the difference there?

In reality, from the time of submitting their Offer, your client can reasonably expect to have a whopping 12 to 14 months to come up with the cash. By filing the Offer with a 12 month multiplier, you get the lowest possible RCP calculation. You simply file it as a Lump Sum Cash Offer, include the 20% down, and need to come up with the other 80% a full 5 months after acceptance. In other words, in section 5 of Form 656, you put ONE payment, dated 5 months after acceptance of the Offer.

With this strategy, you get the lowest possible Offer amount, plus don’t have to make payments on that Offer while it’s being reviewed. Having an entire year or more to come up with the lump sum payment should be plenty of time. If that’s not enough time for your client to raise the money under the 12 month calculation, then something is either inherently wrong with the RCP calculation or there are additional circumstances that need to be addressed outside the OIC process.

This method of using the OIC system to it’s maximum potential could save some taxpayers tens or hundreds of thousands of dollars. It’s an unconventional way of looking at the Offer system, but that extra time to come up with the money could make a major difference for some of your clients.

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