Overview
Calculating Reasonable Collection Potential (RCP) is a methodical process required when preparing an Offer in Compromise (OIC). The IRS uses RCP to determine whether the amount a taxpayer offers to pay represents the most it can reasonably expect to collect within a defined timeframe. Getting this calculation right affects whether an OIC will be accepted, and it influences negotiation strategy and the type of offer you submit (lump sum vs. periodic payments).
This walkthrough explains the components the IRS examines, step-by-step calculations, documentation you’ll need, common mistakes, and practical tips based on experience working with taxpayers on OICs.
Sources: IRS Offer in Compromise program (Form 656 and instructions) and IRS Collection Financial Standards (see links in the Resources section) are the authoritative references used throughout. (IRS: Offer in Compromise: https://www.irs.gov/businesses/small-businesses-self-employed/offer-in-compromise; IRS: Collection Financial Standards: https://www.irs.gov/individuals/collection-financial-standards.)
The basic RCP formula (short)
RCP = Net realizable equity in assets + (Monthly disposable income × Period in months)
- Net realizable equity in assets = Quick-sale or liquidation value of assets minus secured debt against them.
- Monthly disposable income = Total countable monthly income − allowable living expenses per IRS Collection Financial Standards.
- Period in months = usually 12 months for lump-sum offers; typically 24 months for periodic-payment offers (the IRS will specify which it applies).
The IRS will compare your offer amount to this computed RCP when deciding whether to accept an OIC.
Step 1 — Inventory and value assets (net realizable equity)
What to include:
- Real property (primary residence, other real estate) — use market value, adjusted to quick-sale or forced-sale values the IRS expects.
- Vehicles — use the quick-sale value or trade-in values (NADA, Kelly Blue Book adjusted for condition) and subtract any vehicle loans.
- Bank accounts, investment accounts, cash — current balances.
- Business assets, retirement accounts, life insurance cash value — treated case-by-case (some retirement accounts may be protected or discounted due to withdrawal penalties; life insurance cash values can be counted).
How the IRS values assets:
- The IRS generally applies a quick-sale or forced-sale discount to market value; practitioners commonly use about 80% of full market value as a working quick-sale estimate for real estate, though actual valuation depends on market conditions and documented estimates. For vehicles and personal property, the IRS looks for realistic resale values (trade-in or garage sale values rather than perfect retail). See IRS OIC valuation rules and the instructions to Form 433-A (OIC) and Form 433-B (OIC).
Net realizable equity example steps:
- Market value of home: $300,000
- Mortgage balance: $260,000
- Quick-sale adjustment: 80% × $300,000 = $240,000
- Net equity: $240,000 − $260,000 = −$20,000 (no positive equity to include)
If secured debt exceeds quick-sale value, the net equity contribution to RCP is zero for that asset.
Documentation to support asset values:
- Appraisals or broker price opinions for real estate, recent comparable sales, vehicle valuation printouts, account statements, and loan statements showing outstanding liens.
Step 2 — Calculate monthly disposable income
Countable income:
- Gross wages, self-employment net income, rental income, retirement income, investment income, unemployment, and other regular receipts are generally counted.
- For self-employed taxpayers, use net business income after ordinary and necessary business expenses (documented on profit/loss statements and tax returns).
Allowable expenses:
- The IRS uses the Collection Financial Standards (national and local) for categories such as food, housekeeping, apparel, transportation (ownership and operating costs), and housing/utilities. The IRS also accepts certain necessary itemized expenses (health care out-of-pocket, court-ordered payments, etc.) when properly documented.
- National standards cover items like groceries and clothing; local standards (based on county) set housing and transportation allowances. The IRS updates these standards periodically; always use the most current standards from the IRS Collection Financial Standards page.
Monthly disposable income calculation example:
- Total monthly income: $5,000
- Allowable expenses (per standards + documented items): $3,500
- Monthly disposable income: $5,000 − $3,500 = $1,500
Documentation for income and expenses:
- Recent pay stubs, signed profit/loss statements, bank statements, copies of recurring bills, medical receipts, and proof of child support or mandatory payments.
Step 3 — Choose the period (12 vs. 24 months) and compute RCP
Which period the IRS uses:
- Lump-sum offers generally use 12 months of disposable income.
- Periodic-payment offers typically use 24 months, but the IRS determines the period applied based on the offer type and case factors. Check current IRS guidance or ask your assigned settlement officer.
Putting it together (sample calculation):
- Net realizable equity in assets: $50,000
- Monthly disposable income: $2,000
- Period: 12 months (lump-sum) → Income portion = $2,000 × 12 = $24,000
- RCP = $50,000 + $24,000 = $74,000
This RCP is the baseline the IRS will expect to receive; an acceptable offer must generally equal or exceed the RCP unless other collection issues (e.g., doubt as to collectibility or special circumstances) justify acceptance of a lower amount.
Step 4 — Adjust for special circumstances and exclusions
Common adjustments the IRS considers:
- Necessary personal effects and tools of the trade are generally excluded from asset calculations.
- Retirement accounts: often discounted or protected if funds are inaccessible without severe penalty; however, accessible retirement savings may be counted toward RCP.
- Financial hardship or inability to pay: if full RCP would create extraordinary hardship or if the IRS determines that reasonable collection is doubtful, they may accept less under OIC authority.
In my practice, carefully documenting why a retirement account is practically unavailable (penalties, tax consequences, or employer rules) has persuaded settlement officers to exclude or discount those funds.
Documentation checklist (what to file with an OIC)
- Form 656, Offer in Compromise (signed) — see the Form 656 instructions for payment options and application fee requirements (Form 656: instructions on the IRS OIC page).
- Form 433-A(OIC) or Form 433-B(OIC) — financial disclosure statements showing assets, income, expenses, and supporting documentation.
- Proof of income: pay stubs, recent tax returns, bank statements, profit/loss statements.
- Proof of assets and debts: property appraisals, mortgage statements, vehicle titles and loan statements, account statements.
- Documentation for allowable expenses: leases, utility bills, medical receipts, child support orders, and documentation supporting special expenses.
Refer to the IRS Offer in Compromise page and the Form 656 instructions for the exact filing requirements and acceptable documentation.
Interlinking resources on FinHelp.io:
- For help assembling supporting documents, see Preparing a Strong Financial Package for an Offer in Compromise (FinHelp) — https://finhelp.io/glossary/preparing-a-strong-financial-package-for-an-offer-in-compromise/
- For a primer on the program and eligibility basics, see What Is an Offer in Compromise and How It Works (FinHelp) — https://finhelp.io/glossary/what-is-an-offer-in-compromise-and-how-it-works/
- For building the detailed disclosure, see Preparing a Financial Disclosure Package for an Offer in Compromise (FinHelp) — https://finhelp.io/glossary/preparing-a-financial-disclosure-package-for-an-offer-in-compromise/
Common mistakes and how to avoid them
- Understatement or omission of assets: list all assets and provide documentation; undisclosed assets discovered later can lead to automatic denial.
- Incorrect valuation: overstate quick-sale value or use retail prices; use conservative, documentable valuations (sales comps, KBB/NADA printouts).
- Improper expense claims: do not claim expenses that aren’t supported by the Collection Financial Standards or by documentation; the IRS will question large or unusual claims.
- Missing or inconsistent documentation: reconcile bank statements, tax returns, and the Form 433 entries before submission.
Practical negotiation and filing tips
- Run the numbers before filing. If your computed RCP is close to your planned offer amount, consider whether additional documentation, expense substantiation, or re-evaluation of asset values can lower the RCP.
- Consider the type of offer: a lump-sum cash offer (often with a 20% initial payment) may be stronger in some cases; a periodic-payment offer spreads payments but usually uses a longer income projection.
- Keep filings current: all tax returns must be filed and you must be in compliance with estimated tax payment and withholding requirements to remain eligible.
- If you disagree with the IRS valuation or RCP conclusion, you can request reconsideration, provide supporting evidence, or appeal after denial. See options after a denied OIC on FinHelp for next steps.
Example scenario (detailed)
Client facts:
- Quick-sale value of assets (bank, vehicles, other): $50,000 total (supported by statements and valuation printouts)
- Monthly gross income: $6,000
- Allowable monthly expenses (per standards + approved itemized): $4,250
- Monthly disposable income: $6,000 − $4,250 = $1,750
- Offer type: lump-sum (12 months)
Calculation:
- Income portion: $1,750 × 12 = $21,000
- RCP = $50,000 + $21,000 = $71,000
If the taxpayer proposes an offer of $60,000, expect the IRS to view that as below RCP unless other mitigating factors exist (hardship, unrecoverable assets, legal limitations). Documenting why certain assets are not collectible (e.g., liens, bankruptcy protections) can change the analysis.
When to get professional help
Calculating RCP accurately and marshaling supporting documentation are the parts of the OIC process that most commonly determine success or denial. In my practice I’ve seen well-documented offers accepted when improvised submissions were denied. If your financial picture is complex (business interests, multiple properties, self-employment, mixed asset types), work with a tax professional or CPA who regularly handles OICs.
Closing notes and disclaimer
This article summarizes how Reasonable Collection Potential (RCP) is calculated for Offer in Compromise purposes based on IRS guidance and common practice. It is educational and does not substitute for personalized tax advice. For case-specific guidance, consult a qualified tax professional or the IRS directly.
Authoritative resources
- IRS — Offer in Compromise (Form 656 and program overview): https://www.irs.gov/businesses/small-businesses-self-employed/offer-in-compromise
- IRS — Collection Financial Standards: https://www.irs.gov/individuals/collection-financial-standards
- IRS Publication 594, The IRS Collection Process: https://www.irs.gov/publications/p594
Last reviewed: 2025. For the latest forms, dollar figures, and tables, always check the IRS website before preparing an OIC.
