Reasonable Collection Potential (RCP) is a term used by the IRS that refers to the amount of money they could get from you to pay off your IRS debts if they seized everything they could from you, garnished your wages, and levied your bank accounts and retirement savings plans. It is the amount you could give the IRS if you sold off all of your assets, drained your bank accounts, took out loans, and gave them your extra income for the next several years.
In an IRS negotiation, RCP is the magic number. It is the minimum amount the law allows the IRS to settle your debt for. Knowing your RCP will let you plan out your entire negotiation.
If your RCP is more than what you owe the IRS, you will have to pay your debt in full or in monthly payments.
If your RCP is less than what you owe, then you may qualify for an IRS Partial Pay Agreement, an IRS Offer in Compromise, or non-collectible status.
To calculate your RCP, you can fill out IRS form 433-A available on the IRS website or if the form is too confusing, you can use the following formula:
Step 1: Add up the amount of money you have plus the amount of money you could borrow (including a home equity loan)
Step 2: Take the total from step 1 and add it to the amount you could get by selling your stocks and other various assets
Step 3: Take the new total from step 2 and add to it the amount of your wages that you won’t need to pay your basic living expenses over the next 5 years.
The final amount from step 3 should give you a reasonable expectation of your RCP.
The IRS must follow specific guidelines when settling your debts. The purpose of the negotiations is to justify a lower payment amount or a lower RCP by using actual bank statements, court documents, invoices, pay stubs, and other hard evidence. The purpose is to prove you are entitled to a lower payment, not to assert that you think you should pay less.
Knowing your RCP before the IRS does lets you know, up front, what the IRS is likely to settle for and is really key to prevailing in your IRS negotiation. As always, if you are faced with a serious tax problem and feel in over your head, you should consider at least speaking with a tax professional over the phone to discuss your options. Many reputable tax firms offer an initial free consultation and at a minimum, you will be better informed about your particular situation and possible options.