Overview

Reasonably Collectible Income (RCI) is the IRS’s working measure of what a taxpayer can reasonably pay toward outstanding tax liabilities when applying for an Offer in Compromise (OIC). The IRS looks beyond gross pay to disposable income after allowable expenses. That disposable amount — usually converted to an annual or reasonable collection-period total — becomes a core factor in whether an OIC will be accepted and what a competitive offer should be.

This article explains the step-by-step calculation, what the IRS accepts as allowable expenses, real-world examples, common mistakes, documentation requirements, and practical strategies based on professional experience. References to IRS guidance are included so you can verify rules and figures yourself (IRS, Offer in Compromise; Collection Financial Standards).

Sources: IRS Offer in Compromise — What It Is and How It Works (https://www.irs.gov/Individuals/Offer-in-Compromise-What-It-Is-and-How-It-Works) and the IRS Collection Financial Standards (Form 656-B) (https://www.irs.gov/pub/irs-pdf/f656b.pdf).

How the IRS defines and uses RCI

The IRS treats RCI as the taxpayer’s monthly disposable income after allowable expenses. For offer evaluation the Service usually:

  • Calculates “monthly disposable income” = total monthly income − allowable monthly living and business expenses; then
  • Converts that monthly disposable income into a collection potential — commonly by multiplying by 12 months for lump-sum offers (the IRS may use a different period for periodic-payment offers or in special circumstances) (IRS, Collection Financial Standards).

Additionally, the IRS considers reasonably collectible equity in assets (homes, vehicles, bank accounts). That equity is added to the disposable-income collection potential when setting a minimum acceptable offer. For more on asset equity, see our glossary entry on Assessing Reasonably Collectible Equity for an Offer in Compromise.

Step-by-step RCI calculation (practical formula)

  1. Add all gross monthly income sources: wages, self-employment receipts (net), social security or pension income, rental income, investment income, unemployment, and other recurring receipts.
  2. Subtract allowable monthly expenses using two sources:
  • Reasonable actual expenses for non-discretionary items (e.g., medical costs not covered by insurance), and
  • IRS Collection Financial Standards (national and local standards) for food, clothing, housing, transportation and other basic items. The IRS provides standard tables in Form 656-B (https://www.irs.gov/pub/irs-pdf/f656b.pdf).
  1. Monthly disposable income = (total monthly income) − (total allowable monthly expenses).
  2. Estimate collection potential: typically Monthly disposable income × 12 = 12-month collection potential for a lump-sum offer. Add reasonably collectible equity in assets to reach the total amount the IRS would consider collectible.

Practical formula:

RCI (collection potential) ≈ (Monthly Income − Allowable Monthly Expenses) × 12 + Reasonably Collectible Equity

Notes:

  • If monthly disposable income is negative or essentially zero, collection potential from income may be $0; the IRS still considers asset equity.
  • For periodic-payment offers, the IRS will evaluate the monthly disposable income directly as the proposed monthly payment.

Two worked examples

Example A — Wage earner (simple):

  • Gross monthly income: $5,000
  • Allowable monthly expenses (IRS standards + actual): $4,200
  • Monthly disposable income: $800
  • 12-month collection potential: $800 × 12 = $9,600
  • Reasonably collectible asset equity: $0
  • Minimum offer the IRS may consider (approx.): $9,600

Example B — Self-employed with variable income:

  • Average monthly net income (after business deductions): $4,500
  • Allowable monthly household and business expenses (verified): $4,600
  • Monthly disposable income: −$100 (treated as $0 for income-based collection potential)
  • Reasonably collectible equity: $3,500 in bank accounts
  • Minimum offer the IRS may consider (approx.): $3,500

These examples are simplified. The IRS will scrutinize the figures and require documentation for each income and expense line.

What counts as “allowable expenses”?

The IRS allows:

  • Housing, utilities, property insurance and taxes (subject to reasonable limits and local adjustments),
  • Food, clothing and other daily living expenses (using IRS national or local standards),
  • Transportation costs (IRS mileage/transportation standards or documented vehicle payments),
  • Health care and medical expenses not covered by insurance (documented),
  • Court-ordered payments such as child support, and
  • Ordinary business expenses for the self-employed (must be ordinary and necessary and backed by records).

The IRS will not allow discretionary or luxury spending (vacation costs, premium cable, high-end memberships) unless clearly required for a taxpayer’s health or employment and well-documented.

Refer to the IRS Collection Financial Standards for the exact monthly standard amounts and tables (https://www.irs.gov/pub/irs-pdf/f656b.pdf).

Documentation the IRS expects

You must support every line in your calculation. Typical documentation includes:

  • Pay stubs, W-2s, 1099s, profit-and-loss statements for self-employed taxpayers,
  • Bank statements (3–6 months),
  • Lease/mortgage statements and property tax bills,
  • Insurance and utility bills,
  • Medical bills and insurance EOBs,
  • Receipts or cancelled checks for recurring payments.

See our guide on How to Prepare Proof of Income for an Offer in Compromise for a practical checklist and sample documents.

Special considerations for self-employed and volatile income

  • Use a recent 12-month average or a reasonable forward-looking projection; show bookings and contracts to justify projections.
  • Separate allowable business expenses from personal household expenses — the IRS accepts ordinary and necessary business expenses, but will require evidence (books, invoices, bank records).
  • Be ready to explain one-off income spikes (asset sales, legal settlements) and whether they’re recurring.

Common mistakes and how to avoid them

  • Under-documenting deductions: every claimed expense should have supporting evidence.
  • Using overly optimistic expense figures: the IRS will adjust deductions to its standards if unsupported.
  • Forgetting non-wage income: Social Security, pensions, rental income, and investment returns are included.
  • Ignoring asset equity: bank balances, investments and vehicle/home equity can increase the amount the IRS expects.

If your financial situation changes after you submit an OIC

You must notify the IRS of material changes. An increase in income or a windfall can alter the IRS’s view of what’s collectible and may lead to an adjustment or rejection. Conversely, a significant deterioration in finances (job loss, large medical expense) can be presented to the IRS with updated documentation.

What if the IRS rejects the OIC based on RCI?

You may:

Professional tips from practice

  • Be conservative and consistent: use the IRS standards where appropriate — they often favor the IRS if you guess.
  • Build a paper trail before you file: assembling 3–12 months of documentation speeds review and reduces questions.
  • If self-employed, prepare a signed profit-and-loss statement and reconcile it to bank deposits.
  • If housing costs or medical needs exceed IRS standards, prepare clear documentation to justify the higher expense.
  • Consider professional representation when your finances are complex — I’ve successfully reduced offers when clients provided clear, documented evidence of hardship.

Final checklist before filing an OIC based on RCI

  • Calculate monthly gross income from all sources and document it.
  • List and support all allowable expenses using IRS standards and actual bills.
  • Compute monthly disposable income and the 12‑month collection potential.
  • Add reasonably collectible equity in assets.
  • Ensure you have Form 656 (Offer in Compromise) and Form 433‑A or 433‑B (as required) completed and all supporting documents.

The IRS’s Offer in Compromise page explains eligibility, submission requirements, and where to send offers: https://www.irs.gov/Individuals/Offer-in-Compromise-What-It-Is-and-How-It-Works.

Professional disclaimer: This article is educational and based on current IRS guidance and professional experience as of 2025. It is not individualized tax advice. Consult a CPA, enrolled agent, or tax attorney for advice specific to your facts.

Authoritative sources:

Related glossary entries on FinHelp.io:

If you want a downloadable worksheet or sample completed calculation, consider engaging a tax professional or use the worksheets in the IRS Form 656 instructions to build your submission.