A client owes $84,000 to the IRS, just lost a wrongful-termination lawsuit she filed against her former employer, has $1,400 in checking, and a 2018 Form 1040 still on the books. She wants to know if bankruptcy wipes the debt, if an offer in compromise is realistic, and what the revenue officer will accept as "reasonable" rent. Three different IRS resolution frameworks answer those three questions. Picking the wrong one wastes a year.
The revenue officer or ACS unit will resolve every delinquent account through one of three pathways. Choosing among them turns on the taxpayer's Reasonable Collection Potential (RCP) and current cash flow.
Installment Agreement (IA). Pays the full liability over time.
- Guaranteed IA (§6159(c)): Individual owes $10,000 or less (excluding penalties and interest), can pay within 3 years, filed last 5 years on time, no prior IA in 5 years.
- Streamlined IA: Aggregate assessed balance $50,000 or less for individuals ($25,000 for businesses), pay within 72 months or by Collection Statute Expiration Date (CSED), whichever is earlier.
Common mistakes
- Treating RCP future income as 60 months always. Pre-2012 OICs used 48 or 60 months. Current rule is 12 months (lump-sum) or 24 months (periodic). Trap answer: "RCP includes 60 months of future income."
- Allowing credit-card minimums in Collection Financial Standards. Unsecured consumer debt payments are not allowable expenses. Only secured-debt minimums to the extent of asset equity count. Trap answer: "$400 monthly credit-card minimum reduces disposable income."
- Forgetting the 240-day extension during a pending OIC. A pending OIC tolls the 240-day rule plus 30 days. A taxpayer who files an OIC, has it rejected, then files Chapter 7 the next month may find the 240-day clock has not actually run.
Bottom line
- Three collection alternatives: Installment Agreement (pay over time), Offer in Compromise (settle for less), Currently Not Collectible (suspend collection), chosen by RCP and cash flow.
- Streamlined IA caps at $50,000 assessed balance for individuals, with 72-month or CSED terms and no full financial disclosure.
- OIC RCP formula: net realizable equity in assets plus future income (12 months for lump-sum, 24 months for periodic).
- Bankruptcy 3-2-240 rule: income tax dischargeable if return due 3+ years ago, filed 2+ years ago, assessed 240+ days ago, no fraud, no late SFR.
Exam shortcut
Memorize 3-2-240 for income-tax bankruptcy discharge and add "no fraud, return-must-have-been-filed-by-taxpayer." Any one missing means non-dischargeable. RCP multipliers are 12 and 24, never 48 or 60. Lump-sum (5 or fewer payments within 5 months) = 12. Periodic (6 to 24 months) = 24. Insolvency math: subtract FMV of all assets from total liabilities including the debt about to be canceled.
The full lesson (about 2,591 words, 17 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- 3
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