Question

how should a taxpayer determine an appropriate offer amount for an offer in compromise? the offer amount should be equal to: a. the maximum amount the taxpayer can borrow from all sources b. the taxpayer's reasonable collection potential which is the net equity of the taxpayer's assets plus the monunt the IRS could collect from the taspayer's future earnings c. the total value of all of the taspayer's assets at the time the offer is submitted d. the amount of cash the taxpayer has on hand at the time the offer is submitted

Answer 1

As per IRS topic number 204, an offer in compromise is an agreement between a taxpayer and IRS to settle taxpayer's liability for less than the amount fully owed by the taxpayer to IRS. As per 204, IRS will not accept an offer in compromise unless and until the amount offerred by the taxpayer is equal to or greater than the taxpayer's reasonable collection potential. This includes the value that can be realized from the taxpayer's assets, such as real property, automobiles, bank accounts, and other property. In addition to property, the RCP also includes anticipated future income less certain amounts allowed for basic living expenses.

Therefore, in the given question correct answer is B, the taxpayer's reasonable collection potential which is the net equity of the taxpayer's assets plus the amount IRS could collect from future earnings.