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A Guide To Tax Resolution Terms

As we’ve pointed out before, tax resolution is a major focus of our practice here at Mackay, Caswell & Callahan, P.C., and for that reason we’ve covered a number of different topics related to this focus. Resolving tax obligations with the Internal Revenue Service and New York State is a primary focus of ours. Throughout our various blog posts pertaining to tax resolution, we’ve discusses many terms which are likely to be unfamiliar to the casual reader. That’s no surprise.

In this post, we want to walk our readers through the complexity of tax terminology.  We’ll provide concise, useful explanations for a few terms which you’ve previously seen and which you’ll likely see again. Our thinking is that the more familiar our readers are with the terminology, the easier it is to follow. That way, our readers can make informed decisions about how to best run their financial lives. So let’s get started.

Realistic Collection Potential (RCP)

When you submit an offer in compromise, or OIC, the IRS looks first looks at your present financial situation.  It develops a sense of the amount it can reasonably expect to collect from you. “Realistic collection potential,” or RCP, is the term to describe this collection analysis.  RCP entails a look at a taxpayer’s complete financial condition.  That includes assets, current income level, debt level and other relevant factors (such as health and disability status, for instance).  Significantly, if a taxpayer submits an offer below the taxpayer’s RCP, the IRS will typically reject the OIC.  

Offer in Compromise

An offer in compromise is literally an offer made to settle existing tax debt.  An OIC can be made to either the IRS or, in many circumstances, a state.  As its name implies, the offer is for less than full face amount of the tax debt. In other words, an OIC is an attempt to negotiate partial tax debt forgiveness.  Offers in compromise are analyzed according to certain criteria and then either accepted or rejected. As discussed above, the IRS develops a sense of what it’s likely to collect from a taxpayer.  That is, the reasonable collection potential is weighed against the actual offer made by the taxpayer. 

Fresh Start Initiative

The Fresh Start Initiative is the much publicized program created by the IRS to to provide taxpayers with tax relief. It provides four main types of assistance for taxpayers: tax penalty relief, installment plan agreements, OICs and tax lien relief. The Fresh Start Initiative increases the ability of taxpayers to put together a workable installment payment agreement.  It also loosens the standards for OIC reviews.  In similar fashion, it makes it easier to obtain tax lien and tax penalty relief.

IRS Installment Payment Agreements

IRS installment payment agreements, or IPAs, are plans to pay back federal tax debt.  IPAs provide tax relief by typically allowing taxpayers to make fixed monthly payments on their back tax debt. The IRS employs different rules and requires different documentation depending on the amount owed.  Obligations below $50,000 qualify for streamlined installment payment agreements.  Those in excess of $50,000 require additional documentation, in the form of a collection information statement. As with OICs, IPAs are reviewed according to certain criteria, so taxpayers should familiarize themselves with the criteria before pursuing an agreement. 

Debt Consolidation

Debt consolidation is the process of “bundling” different types of debt together for the purpose of making fewer payments.  Ideally, debt consolidation includes paying off these debts with lower interest rates. The process involves obtaining a loan, which are used to pay off multiple preexisting loans.  The taxpayer/debtor then only has to make a single payment on the consolidation loan. A proper debt consolidation provides two benefits.  The first is the lower interest rate on the consolidation loan.  The second is the decrease in stress and workload that comes with a single payment obligation.  In another of our blog posts, we discuss common debt consolidation terms to better help you understand the process.

Cost Basis

This can be a tricky one, even though basis is a foundational concept in taxation.  The concept refers to one’s level of investment in a given asset. In simple terms, cost basis, or “tax basis,” is a reflection of that investment.  Its intent is to offset gain.  That way, only those gains not yet been taxed are subject to tax. For example, when someone purchases a house for $500,000, that expense is its original “basis.” If that same house is later sold for $550,000, the only tax due is on the $50,000 of profit. There is no tax on the basis.  This makes intuitive sense.  That’s because taxing the full sale price of $550,000 results in double taxation and deters investment. 

New York Tax Resolution Attorneys

There you have it!  If you learn and understand these terms, you’ll be well on your way to becoming a skilled reader of the MCC blog.  That’s especially true of our posts dealing with tax resolution. The professionals at MCC work hard to master this sort of material.  We do it because it lets us better serve our clients. So, if you have an IRS or New York tax resolution issue, or any other tax or business law issue, don’t hesitate to call one of our New York tax attorneys today.  With offices in much of New York including Albany, New York City, Rochester and Syracuse, we’re available to help right away. 

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