Filing an Offer in Compromise (OIC) can be quite an ordeal if you’re not prepared. If the IRS decides your offer is worth considering, then they will look very carefully at every aspect of your finances, including assets, income, and expenses. The result of this analysis is your “reasonable collection potential” (RCP) — the single most important factor in determining whether or not your offer is accepted.
When the IRS looks at expenses, they determine which ones can be allowed, and of the expenses that can be allowed, how much can be allowed. Generally speaking, more/greater expenses result in a lower RCP and a lower offer.
Formerly: The IRS did not allow payments made pursuant to a state or local tax installment agreement (IA) in the RCP analysis. The underlying reasoning for this was that the laws of the federal government trump the laws of state and local governments when it comes to collection of revenue. The IRS simply ignored the practical realities of the situation.
Currently: Under the Fresh Start program, the IRS will allow state or local tax installment agreement payments — not all of them all of the time, but compared to the way the IRS used to treat them, this is a step in the right direction and very good news for those in need of tax relief.