How Offer in Compromise Amounts Are Calculated: A Simple Walkthrough

Quick answer

The IRS sets an Offer in Compromise (OIC) amount by estimating what it can reasonably collect from a taxpayer — called the Reasonable Collection Potential (RCP). RCP equals the collectible value of assets plus the portion of monthly income the IRS determines is available for paying taxes. The OIC you submit should generally meet or be below the RCP for the IRS to accept it. (See IRS guidance: https://www.irs.gov/payments/offer-in-compromise)

How the IRS looks at your ability to pay

When you file an OIC, the IRS asks for a detailed, documented financial picture. The main components are:

• Income: All sources — wages, self-employment, retirement, investment income, Social Security (when applicable), alimony, and other receipts.
• Allowable expenses: Expenses that the IRS permits for collection analysis. These include national and local standards for housing, utilities, food, transportation and certain health care costs. The IRS’s Collection Financial Standards define the categories and amounts (see https://www.irs.gov/businesses/small-businesses-self-employed/allowable-collection-expenses).
• Assets: Equity in real estate, vehicles, bank accounts, investments, business assets (for business debt), and other property that could be sold or borrowed against.

The IRS subtracts allowable expenses from monthly income to find your monthly disposable income. It then combines this disposable income with the net realizable equity in assets to form the RCP.

The Reasonable Collection Potential (RCP) — the core formula

In practice, the IRS evaluates an offer using this concept:

RCP = Net realizable equity in assets + (Monthly disposable income × projected collection period)

• Net realizable equity in assets means fair-market value minus selling costs and any secured debt against the asset (for example, the loan balance on a car or mortgage on a home).
• Monthly disposable income is total monthly income minus allowable monthly expenses as defined by the Collection Financial Standards.
• Projected collection period: The IRS applies a collection period to the monthly disposable income component. The precise months used can vary with case facts (e.g., whether you propose a lump-sum or periodic payment offer), and IRS personnel use established guidance and local considerations to select an appropriate period.

Because IRS rules and practice change modestly over time, use the IRS Offer in Compromise page and Form 656 instructions when preparing your calculation: https://www.irs.gov/payments/offer-in-compromise and https://www.irs.gov/forms-pubs/about-form-656.

Two common offer types (how they change the calculation)

• Lump-sum cash offers: You propose a single payment (often with a short timeline). The IRS will give weight to the immediate collectible resources — bank balances, withdrawals from investments, and the near-term ability to pay.
• Periodic payment offers: You propose scheduled payments over time. In this case, the IRS evaluates how much you can reasonably pay each month and whether the total over an agreed term (plus asset equity) equals what the IRS could collect.

Which type you choose affects the collection period and how the IRS values monthly disposable income. An experienced practitioner can help select the structure that presents the lowest RCP consistent with your true ability to pay.

Step-by-step walkthrough (practical example)

This example is illustrative and simplifies some IRS rules. Use it to understand the mechanics, not as a substitute for Form 656 calculations.

1. Gather your numbers:

• Gross monthly income: $3,000
• Allowable monthly expenses (IRS standards + verified costs): $2,500
• Monthly disposable income: $3,000 − $2,500 = $500
• Equity in assets: bank account $200, vehicle fair-market value $5,000 minus loan balance $4,000 = $1,000 equity → total asset equity = $1,200

1. Estimate the collection period and multiply:

• If the IRS applies a 24‑month collection period (common in many cases for individuals), disposable income contribution = $500 × 24 = $12,000

1. Calculate RCP:

• RCP = asset equity $1,200 + disposable income contribution $12,000 = $13,200

1. Compare to tax liability:

• If you owe $30,000, the RCP ($13,200) suggests the IRS could reasonably collect $13,200. An acceptable OIC would generally need to be at or above that figure (subject to negotiation and IRS casework discretion).

Note: The 24‑month multiplier above is an illustration commonly seen in practice, but the IRS may apply different collection periods depending on facts and local procedures. Always check the current IRS guidance and consult a tax professional when preparing an offer.

Required forms and fees

• Form 656, Offer in Compromise — the application form for individuals and businesses (https://www.irs.gov/forms-pubs/about-form-656).
• Financial statements: Form 433‑A (OIC) for individuals or unsecured businesses and Form 433‑B (OIC) for businesses, or equivalent documentation. These forms collect the income, expense, and asset detail the IRS uses for RCP.
• Application fee: The IRS charges an application fee (current fee and low-income waiver rules are on the IRS OIC page). Low-income taxpayers may qualify for a fee waiver and a reduced or no initial payment; check the IRS guidance when you apply.

For a practical checklist on documents and how to prepare your financial statement, see our internal guidance: Preparing an Offer in Compromise: Documentation Checklist (https://finhelp.io/glossary/preparing-an-offer-in-compromise-documentation-checklist/).

What the IRS accepts (and what it rejects)

• The IRS will accept an OIC if the offer equals or exceeds its RCP and there are no other collection issues (e.g., enforcement actions or pending bankruptcy).
• If the offer is less than RCP, it’s likely to be rejected unless there are special circumstances (e.g., doubt as to liability or exceptional hardship).

Common reasons for rejection include incomplete documentation, understating income, omitting assets, or relying on non‑allowable expenses. See our piece on Calculating Reasonable Collection Potential for an Offer in Compromise for a deeper example (https://finhelp.io/glossary/calculating-reasonable-collection-potential-for-an-offer-in-compromise-a-walkthrough/).

Timing, appeals, and next steps

• Processing times: OICs can take several months to a year or longer, depending on case complexity and IRS workload. During review, IRS may request additional documents or ask clarifying questions.
• If rejected: You can appeal through the IRS appeals process or consider alternatives such as an installment agreement or currently not collectible status. Our guide Choosing Between an Installment Agreement and an Offer in Compromise explains tradeoffs in many situations (https://finhelp.io/glossary/choosing-between-an-installment-agreement-and-an-offer-in-compromise/).

Practical tips from practice

In my experience helping clients for more than 15 years:

• Be conservative and fully document every claimed expense. The IRS uses published Collection Financial Standards for many judgments, but verified out‑of‑pocket costs (medical bills, childcare) need supporting records.
• Don’t hide assets. The IRS has access to financial records and will treat undisclosed resources as a major negative factor.
• Consider the offer type carefully. Sometimes a periodic payment offer yields a lower immediate payment and better negotiating leverage; other times a lump-sum offer gets faster closure.
• Use a pre‑qualifier tool or consult a specialist. A quick pre‑review helps avoid fees and keeps your expectations realistic.

Common misconceptions

• “I can offer any amount I want.” You can propose any amount, but the IRS will compare your proposal to the RCP and reject offers well below what it believes it can collect.
• “If I file an OIC, the IRS stops collection forever.” Filing an OIC pauses some collection actions while the offer is pending, but not all enforcement actions stop automatically; read the Form 656 instructions and consult with counsel.
• “Bankruptcy and OIC are compatible.” If bankruptcy is pending, filing an OIC may be premature; discuss both options with a professional.

When to get professional help

If your situation includes substantial assets, business ownership, complex income streams, or pending enforcement (levies/foreclosures), working with a tax attorney, CPA, or enrolled agent experienced in OICs materially increases the chance of preparing an accurate RCP and an acceptable offer. In my practice, careful documentation and realistic offers are the most frequent drivers of acceptance.

Sources and where to read more

• IRS — Offer in Compromise (main page): https://www.irs.gov/payments/offer-in-compromise
• IRS — About Form 656: https://www.irs.gov/forms-pubs/about-form-656
• IRS — Allowable Collection Expenses (Collection Financial Standards): https://www.irs.gov/businesses/small-businesses-self-employed/allowable-collection-expenses

This article is educational and not personalized tax advice. Rules change and individual circumstances vary; consult a qualified tax professional before submitting an Offer in Compromise.