Why the MAO matters

Estimating the Minimum Acceptable Offer is the practical core of preparing an Offer in Compromise (OIC). The IRS evaluates an OIC against what it calls the taxpayer’s “reasonable collection potential” (RCP)—the amount the government can reasonably collect through seizing assets, future income, or payment plans. If your proposed offer is lower than the IRS’s RCP, it is likely to be rejected. (See IRS guidance: Offer in Compromise; IRS Publication 593.)

Core components used to estimate the MAO

  1. Net realizable equity in assets
  • Calculate the fair market value of nonexempt assets (bank accounts, vehicles, investment accounts, rental property) and subtract outstanding debt secured by those assets (e.g., a car loan). The result is the net realizable equity the IRS expects to capture. The IRS provides rules on which assets are considered and typical allowances. (See IRS Pub. 593 and Collection Financial Standards.)
  1. Monthly disposable income
  • The IRS uses the Collection Financial Standards (CFS) to determine allowable monthly living expenses. Monthly disposable income = monthly gross income (household) − required taxes − allowed living expenses. Allowed expenses include basic housing, utilities, food, transportation allowances, and some secured debt payments per CFS tables. (IRS Collection Financial Standards.)
  1. The multiplier (months)
  • The IRS converts monthly disposable income into an expected future collection amount by multiplying it by a set number of months. In practice, practitioners use 12 months for lump-sum offers and 24 months for periodic (installment) offers as a starting point when estimating the MAO. The exact months used can vary depending on case facts and the IRS examiner’s evaluation.

Simple MAO formula

MAO = Net Realizable Equity + (Monthly Disposable Income × Number of Months)

Practical example

  • Assets: bank and investment accounts fair market value $50,000
  • Secured debts against assets: $20,000
  • Net realizable equity: $30,000
  • Household gross monthly income: $5,000
  • Allowed monthly living expenses (per CFS and verified items): $3,200
  • Monthly disposable income: $1,800
  • Multiplier used for a lump-sum estimate: 12 months

Estimated MAO = $30,000 + ($1,800 × 12) = $51,600

This estimate gives you a realistic floor for an offer that the IRS is likely to consider. If you submit an offer materially below this number without strong hardship evidence, the chance of rejection increases.

Documentation and presentation

  • Provide complete financial statements and substantiating documents: bank statements, paystubs, mortgage statements, asset appraisals, and proof of recurring expenses. The IRS expects documentation supporting each component of your MAO calculation. (See preparing documentation guidance.)
  • Carefully reconcile bank balances and identify any nonexempt asset values. Small errors or missing documents are a common cause of delays or denials.

When the MAO can be adjusted

  • Allowable expenses: If you can document higher-than-standard necessary living expenses (medical bills, unusual dependent care), the IRS may allow higher expenses under the CFS or as a special circumstance.
  • Asset valuation: Proper valuation (e.g., current car market value vs. loan balance) can lower net realizable equity if supported by evidence.
  • Special hardship: For taxpayers with proven economic hardship, the IRS may accept an offer below the calculated RCP; these are fact-intensive and require strong documentation.

Alternatives and strategic considerations

Common mistakes to avoid

  • Underestimating monthly disposable income because of omitted household income or nonreporting of spousal income. Always include household income unless legally separated and living apart.
  • Overvaluing allowable expenses by using items not supported by CFS or lacking documentation.
  • Submitting an offer far below a documented MAO without explaining hardship—this typically triggers a quick rejection.

Practical tips from practice

In my experience working with clients over 15 years in tax resolution, the single biggest win comes from careful documentation and realistic offers. Start with a conservative MAO estimate, validate every number with paperwork, and consider a modest buffer above the MAO to avoid unnecessary rejection. When unusual expenses exist (ongoing medical costs, verified childcare needs), document them early so the reviewer can consider them as special circumstances.

Timing and process notes

  • OIC review timelines vary. Complex cases can take many months; stay responsive to IRS information requests. (IRS OIC pages and Pub. 593 provide process expectations.)

Sources and further reading

Disclaimer

This article is educational and not a substitute for personalized tax or legal advice. For a tailored MAO calculation and negotiation strategy, consult a qualified tax resolution professional or an enrolled agent.