How the IRS Reviews Assets for Offers in Compromise: What Counts

Background

The Offer in Compromise (OIC) program lets taxpayers settle tax debts for less than the full balance when collection of the full amount is unlikely or would cause financial hardship. Central to OIC decisions is the IRS’s asset review. The agency uses the asset values to compute Reasonable Collection Potential (RCP)—the amount it believes can be collected through seizure, sale, or future income—and compares that to the offer. (IRS — Offer in Compromise: https://www.irs.gov/individuals/offer-in-compromise)

How the IRS counts assets (what typically “counts”)

• Cash and bank accounts: current balances are counted at face value.
• Investments: stocks, bonds, brokerage accounts and mutual funds are valued at current market value.
• Real estate: equity is calculated as fair market value (FMV) minus mortgages, liens and reasonable sale costs.
• Vehicles and boats: FMV less outstanding loans and allowable selling costs.
• Business assets: equipment, inventory, and goodwill may be counted; allowable business liabilities are deducted.
• Personal property: jewelry, collectibles and other non-exempt items are included at FMV.
• Retirement accounts: the IRS identifies retirement assets; treatment varies—some plans may be largely protected from collection but can still affect an OIC depending on accessibility and tax law. Expect the IRS to review plan type, balance and withdrawal penalties.

What the IRS deducts or allows against asset value

• Secured debt: the outstanding loan balance against an asset is subtracted from FMV to get net equity.
• Reasonable selling costs: commissions, estimated closing costs, and taxes necessary to liquidate an asset are often deducted.
• Allowed exemptions: some assets may be partially sheltered under state or federal exemptions; treatment depends on whether the asset can realistically be accessed to pay taxes.

Key concept: Reasonable Collection Potential (RCP)

RCP = net realizable equity in assets + collectible future income (monthly income minus allowable living expenses). The IRS compares RCP to your proposed offer. If RCP is greater than the offer, the IRS will likely reject or ask for a higher figure. (IRS — Offer in Compromise and Form 656: https://www.irs.gov/forms-pubs/about-form-656)

How the IRS values assets in practice

• Fair market value (FMV): the price a willing buyer would pay a willing seller. The IRS may accept recent sales, appraisals, dealer valuation guides, or comparable sales data.
• Liquidation vs. going-concern value: for many OIC cases the IRS uses a liquidation view (what you could realize now), not the full replacement or sentimental value.
• Documentation: bank statements, mortgage payoff letters, vehicle loan statements, recent appraisal reports, and signed repair/condition estimates strengthen your submission.

Real-world examples (typical outcomes)

• Example 1: A taxpayer lists a car with FMV $8,000 and a $3,000 loan. IRS counts $5,000 net equity (minus selling costs).
• Example 2: A small business owner has equipment with FMV $20,000, but $12,000 secured by a lender; IRS counts $8,000, and may reduce further for realistic resale costs.

Who is affected / eligibility signals

Taxpayers who have lower RCP relative to owed tax—because assets are minimal, encumbered by liens, or incomes are limited—are likelier to have an OIC accepted. Those with significant unencumbered equity in real estate or investments face a higher bar. Eligibility is also affected by filing compliance: required returns must be filed and estimated taxes paid as applicable. (IRS OIC guidance)

Common pitfalls and misconceptions

• Misconception: “I can hide assets.” The IRS has access to third-party records and public filings; nondisclosure can lead to rejection or later collection actions.
• Mistake: undervaluing assets without documentation—IRS will ask for proof and may use its own valuation.
• Mistake: ignoring secured debt—list loans and liens so the IRS applies the correct net equity.

Practical tips when preparing asset details for an OIC

1. Be thorough: provide clear documentation for FMV and debts (appraisals, pay-off letters, account statements).
2. Use realistic valuations: if an item is hard to sell, explain condition and include comparable sales or dealer quotes.
3. Include selling costs: estimate commissions, transfer taxes or repairs required to sell an asset—these reduce net equity in the IRS calculation.
4. Gather retirement-plan details: provide plan statements and distribution rules; some retirement assets are less accessible and may reduce collectible value.
5. Consult a professional: experienced tax attorneys or enrolled agents specializing in OICs can help present valuations and negotiate. For guidance on preparing financial statements, see our article “Preparing a Financial Statement for an Offer in Compromise: What the IRS Wants to See.” (finhelp.io link: https://finhelp.io/glossary/preparing-a-financial-statement-for-an-offer-in-compromise-what-the-irs-wants-to-see/)

Timing and process notes

• OIC reviews can take months. During that time the taxpayer must remain compliant with filing and payment requirements.
• The IRS may request additional documentation or order appraisals for high-value or unusual items.

Related topics on FinHelp

• Offer in Compromise: How Income Versus Equity Affects Eligibility — explores how the IRS balances asset equity and income when deciding an OIC. (https://finhelp.io/glossary/offer-in-compromise-how-income-versus-equity-affects-eligibility/)
• Preparing a Realistic Offer in Compromise: Income, Expenses, and Supporting Docs — practical checklist for building an OIC the IRS will accept. (https://finhelp.io/glossary/preparing-a-realistic-offer-in-compromise-income-expenses-and-supporting-docs/)

FAQs

Q: Does the IRS count the equity in my home?
A: Yes—equity in real property is typically considered. The IRS calculates FMV minus mortgages, liens and reasonable selling costs. How much equity the IRS expects you to sacrifice depends on local marketability and secured debt.

Q: Are retirement accounts safe from an OIC review?
A: Retirement accounts are reviewed. Some plans are less collectible in practice due to penalties or plan rules, but they can still affect RCP. Provide plan documents and statements to show accessibility.

Q: Will the IRS seize assets during an active OIC?
A: Generally the IRS will not levy while a properly filed, pending OIC is being considered, but enforcement can continue in some circumstances. Keep up with filing and payment requirements and follow IRS instructions.

Authority and further reading

• IRS — Offer in Compromise (official page): https://www.irs.gov/individuals/offer-in-compromise
• IRS — About Form 656, Offer in Compromise: https://www.irs.gov/forms-pubs/about-form-656
• IRS — Collection Financial Standards (used to set allowable living expenses): https://www.irs.gov/individuals/collection-financial-standards
• Consumer Financial Protection Bureau — resources on debt options and how to evaluate relief: https://www.consumerfinance.gov

Professional disclaimer

This article is for educational purposes and does not constitute tax or legal advice. For guidance tailored to your facts, consult a qualified tax professional or tax attorney experienced with Offers in Compromise.