The IRS & “Reasonable Collection Potential” - Income Tax Legal Blogs Posted by Joseph M. Callahan - Lawyers.com

The IRS & “Reasonable Collection Potential”

As we’ve discussed before, when the IRS considers an offer-in-compromise (or OIC) it will view the amount offered with reference to the taxpayer’s reasonable collection potential (or RCP). In other words, when making a determination, the IRS will measure your offer against the amount which it can reasonably expect to collect. This is true both for individual taxpayers and business entities. When reviewing an OIC, the IRS has to make sure that it’s computation of RCP is as sound as possible, because an inaccurate RCP can invalidate a determination by the IRS.  

In the case of Zintl Construction v. Commissioner (T.C. Memo 2017-119), the IRS rejected an OIC from a business entity after it found that the “going-concern” value of the business – which was used to calculate RCP – exceeded the amount offered. The key point to take away from this Tax Court memorandum is that business taxpayers should be aware of their going-concern value as this value can ultimately impact RCP and therefore the probability of submitting a successful OIC. 

The Zintl Construction Facts 

 Zintl was a construction subcontractor with a principal place of business located in Minnesota. The business fell behind in its payment of several taxes and eventually faced a tax deficiency of over $6 million. Zintl submitted an OIC after the IRS filed a tax lien against the business; Zintl offered the sum of $1 million based on his own computation methods. In support of the offer, Zintl provided balance sheets as well as a “forced liquidation” value of the business from a professional appraiser.  

The IRS rejected the sum based on one primary reason: the IRS used the going-concern value of the business when computing reasonable collection potential. What this means is that the value of the business itself – taken as the sum which could be realized if the business were sold on the open market – is used as a factor in calculating RCP.  In the IRS’s determination, the going-concern value of Zintl made the RCP much higher than Zintl could have expected. However, when using the going-concern value, the IRS included the unpaid tax liability of the business in the final value, and so the Tax Court was left with the following question: can the IRS’s rejection of the OIC stand even though the unpaid tax liability of the business was factored into the RCP? 

Reasonable Collection Potential After Zintl Construction

The Tax Court held that the IRS’s rejection of the OIC was unreasonable due to the inclusion of the unpaid tax liability in the RCP. The Tax Court made clear that the question of whether the sum of $1 million itself were unreasonable was still open, but emphasized that the unpaid tax liability obviously would impact the value of the business on the open market. When someone sells a business, the buyer will consider any preexisting liabilities when considering the total value of the business; it makes little sense to simply “add” the tax liabilities to the total value in the manner done by the IRS in this case.  

The lesson here is clear: business taxpayers need to keep an eye on their going-concern value when submitting an OIC, because this value can impact reasonable collection potential. It’s not enough to simply take into consideration assets and liabilities, rather such taxpayers may need to additionally consult with a professional business appraiser, depending on circumstances. This makes perfect sense, because technically the IRS has the ability to “seize” businesses in a way which isn’t possible for individuals (or individual shareholders) and so the business’ value on the market would clearly be relevant for RCP. 

If you’re considering making an Offer in Compromise, we hope you’ll consider the services provided by Mackay, Caswell & Callahan, P.C.  With expertise in a wide range of areas, including OICs, a top New York City tax attorney at MCC  is available to help you today.

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Joseph M. Callahan

Licensed since 1986

Member at firm Mackay, Caswell & Callahan, P.C.

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