Quick overview

Recalculating your monthly payment ability tells the IRS what you can reasonably pay toward outstanding tax debt. The IRS evaluates (a) your monthly disposable income, (b) equity in assets, and (c) reasonable collection potential. Use the IRS Collection Financial Standards and the Offer in Compromise instructions as your baseline: https://www.irs.gov/businesses/small-businesses-self-employed/offer-in-compromise and https://www.irs.gov/individuals/understanding-collection-financial-standards.

Step-by-step: how to recalculate monthly payment ability

  1. Gather documentation
  • Recent pay stubs, bank statements, profit & loss for self-employment, Social Security or benefit statements, rental/royalty income records.
  • Bills and receipts for recurring expenses (rent/mortgage, utilities, insurance, medical, childcare).
  1. Compute total gross monthly income
  • Include all regular income sources: wages, self-employment net income, rental, investment income, and benefits.
  • For variable income (commissions, tips, gig work) average the last 6–12 months.
  1. Apply IRS-allowed living expenses
  • Use the IRS Collection Financial Standards for basic living allowances (housing, food, clothing, transportation ownership/operating): https://www.irs.gov/individuals/understanding-collection-financial-standards.
  • For vehicle expenses, compare IRS ownership and operating allowances to your actual documented costs; the IRS accepts the standard unless higher documented expenses are justified.
  1. Add verifiable necessary expenses
  • Medical expenses, required child support, or education costs may be allowed if documented and reasonable. The IRS reviews these case-by-case; provide invoices, prescriptions, school bills, or court orders.
  1. Calculate monthly disposable income
  • Formula: gross monthly income − IRS-allowed living expenses − required payments = monthly disposable income.
  • Keep this number and support it with records; the IRS expects documentation when you submit Form 433‑A (OIC) or Form 433‑B (OIC).
  1. Consider assets and reasonable collection potential (RCP)
  • The IRS will review equity in assets (home equity above exemptions, vehicles, investments). Net realizable equity reduces the chance of OIC acceptance if it indicates ability to pay.
  • The IRS typically uses your monthly disposable income to estimate what could be collected over time when deciding an OIC. For a lump‑sum offer, examiners commonly consider a 12‑month collection potential; for periodic/offers with payments they evaluate the taxpayer’s ability over the applicable collection period. See the IRS OIC guidance for details: https://www.irs.gov/businesses/small-businesses-self-employed/offer-in-compromise.

Practical example

  • Gross monthly income: $4,000
  • IRS-allowed living expenses (housing, food, transport, utilities, insurance): $3,000
  • Required payments (child support, court-ordered): $200
  • Monthly disposable income = $4,000 − $3,000 − $200 = $800

That $800 is the amount the IRS will factor into its reasonable collection potential calculation; documented asset equity could raise the collectible amount.

Professional tips from practice

  • Use the IRS Collection Financial Standards first; don’t invent benchmarks. If you claim higher-than-standard expenses, provide strong documentation (receipts, bills, medical records).
  • Recalculate when income or expenses materially change—job loss, new medical bills, or change in household size can change eligibility.
  • Prepare both a conservative and aggressive calculation. The conservative (lower disposable income) is a realistic baseline; the aggressive one documents borderline expenses you can justify if needed.

Common mistakes to avoid

  • Mixing pre-tax and post-tax figures. Use gross income and be consistent with expense categories.
  • Forgetting to average variable income over an appropriate period.
  • Omitting recurring but nonmonthly expenses (e.g., quarterly insurance): convert them to monthly equivalents and document.
  • Failing to back up nonstandard expenses with receipts or statements.

Documents to include with an OIC recalculation

  • Completed Form 433‑A (OIC) or Form 433‑B (OIC) as appropriate.
  • Pay stubs, bank statements (3–12 months), profit & loss statements, copies of bills and receipts, court orders for required payments.
  • Statements supporting unusual or medical expenses.

Related resources on FinHelp

When recalculation matters most

Recalculate before submitting an OIC, before convert­ing a payment plan, or if the IRS notifies you of changed circumstances. In my practice, carefully updating calculations with supporting documents has changed outcomes from denials to acceptances because examiners rely heavily on verifiable numbers.

Final notes and disclaimer

This article explains how to recalculate monthly payment ability for OIC eligibility using IRS standards and common practice. It is educational and not individualized tax advice. For a personalized assessment, consult a tax professional or IRS guidance directly: Offer in Compromise (IRS) and Collection Financial Standards.

Authoritative sources

(Disclaimer: This information is current as of 2025 but tax rules and IRS procedures can change. Consult the IRS website or a licensed tax advisor for the latest guidance.)