Overview

When the IRS reviews an Offer in Compromise (OIC), it calculates Reasonable Collection Potential (RCP): the value the IRS expects to collect from a taxpayer now and in the near future. Living expense allowances are subtracted from monthly income when computing RCP. If a taxpayer’s RCP is low enough, the IRS may accept an OIC that settles the debt for less than the full balance. (See IRS Offer in Compromise guidance: https://www.irs.gov/businesses/small-businesses-self-employed/offer-in-compromise)

How the IRS determines allowable living expenses

  • The IRS relies on the Collection Financial Standards (CFS), which include national standards (food, clothing, misc.) and local standards (housing and utilities). The CFS tables are updated regularly and vary by county and household size. (IRS CFS: https://www.irs.gov/individuals/collection-financial-standards)
  • The IRS allows the standards as the baseline; taxpayers should use those numbers on Forms 433-A (OIC) or 433-B. These forms capture income, assets, and monthly expense claims. (Forms info: https://www.irs.gov/forms-pubs/about-form-433-a and https://www.irs.gov/forms-pubs/about-form-433-b)
  • Reasonable Collection Potential = assets available for collection + future income available for collection — allowable living expenses. The lower the RCP, the smaller an acceptable offer may be.

Standard vs. above-standard (extraordinary) expenses

  • Standard allowances: The IRS usually accepts CFS amounts without extra proof for common categories (food, clothing, housing). You should still report accurate numbers on the financial statement forms.
  • Above-standard expenses: The IRS may consider documented expenses above the CFS for items such as high medical costs, disability-related needs, court-ordered support, or unusually high childcare. You must provide clear evidence (bills, insurance statements, court orders, third-party invoices) and explain why the expense is recurring and necessary.

Documentation and forms

  • Use Form 433-A (OIC) for individuals and Form 433-B (OIC) for businesses; attach Form 656 (Offer in Compromise) as required. Complete every line accurately and attach supporting documents: pay stubs, bank statements, medical bills, leases, and receipts.
  • Keep records that show both the expense and its purpose. Vague or inconsistent documentation is the most common reason the examiner applies only the CFS baseline or rejects above-standard claims.
  • For a practical document checklist, see our internal guide: “Filing an Offer in Compromise: Documentation Checklist” (https://finhelp.io/glossary/filing-an-offer-in-compromise-documentation-checklist/).

Practical strategies I use with clients

  • Start with the IRS standards, then build a tight paper trail for any above-standard requests. A clear narrative plus supporting bills is essential.
  • Consider timing: the IRS reviews the taxpayer’s financial snapshot at the time of the offer and periodically while the offer is pending. If your financial picture worsens, document it immediately.
  • If you want to reduce the chance of rejection, review common reasons offers are denied and preempt them. Our article on “Preparing a Strong Offer in Compromise: Avoid Common Rejection Reasons” explains recurring pitfalls (https://finhelp.io/glossary/preparing-a-strong-offer-in-compromise-avoid-common-rejection-reasons/).

What happens if your expense claims are disallowed

  • If the IRS applies only the baseline standards, your RCP will be higher and the required offer amount may increase. You can request appeal rights or submit additional documentation to the IRS officer who made the determination.
  • If the OIC is denied, you can appeal within the IRS or contact the Taxpayer Advocate Service when collection issues create economic hardship.

Common mistakes to avoid

  • Submitting unsupported or one-off receipts as proof of recurring expense.
  • Using inflated estimates instead of matched documentation (leases, utility bills, medical statements).
  • Forgetting to include dependent-related costs or court-ordered obligations that affect monthly cash flow.

When an OIC is a good option

Authoritative sources

Professional disclaimer

This article is educational and does not constitute tax or legal advice. Every OIC case is fact-specific; consult a qualified tax professional before filing. In my practice I routinely verify CFS tables and prepare supporting documentation to help clients document above-standard expenses.