Overview

An Offer in Compromise (OIC) permits qualifying taxpayers to settle federal tax liabilities for less than the full balance when full collection would cause financial hardship. A central driver of any OIC is how the IRS values your assets — real estate, vehicles, business property, bank accounts, and retirement savings — because those values affect the IRS’s calculation of what it can reasonably collect from you.

How the IRS uses asset values (Reasonable Collection Potential)

  • The IRS calculates Reasonable Collection Potential (RCP) to set the minimum acceptable offer. RCP generally equals the taxpayer’s net realizable equity in assets plus the present value of future income the IRS considers collectible (monthly disposable income times a collection horizon). See the IRS Offer in Compromise guidance for details (IRS: Offer in Compromise).
  • Net realizable equity = fair market value (FMV) of an asset minus encumbrances (mortgages, liens) and an allowance for selling costs. The IRS expects honest FMV estimates, not replacement or sentimental value.
  • If your assets are overvalued on the application, the RCP — and therefore the IRS’s minimum required payment — will rise. Conversely, reasonable evidence that an asset’s liquidation value is lower (due to liens, market conditions, or costs to sell) can reduce the RCP.

Valuation methods by common asset type

  • Real estate: Use a comparative market analysis (CMA), recent comparable sales, or a licensed appraisal for disputed values. Subtract outstanding mortgages, selling costs (commissions, repairs), and state exemptions where applicable.
  • Vehicles: Use NADA, Kelley Blue Book, or dealer quotes to determine market value; then subtract loans and a realistic cost-to-sell allowance.
  • Retirement accounts: Report current account balances. Note that many retirement plans are not easily reachable without penalty, and the IRS often discounts retirement value when calculating collectible equity (see IRS guidance).
  • Business interests: Distinguish between going-concern value and liquidation value. Document current revenue, recent appraisals, and the value of inventory, equipment, and receivables. The IRS will scrutinize optimistic owner valuations.
  • Personal property (collectibles, jewelry): Use recent appraisals or auction results; be conservative when estimating resale proceeds.

Practical steps to establish defensible valuations

  1. Gather documentation: recent appraisals, broker CMAs, vehicle guides, account statements, business financials, and liens or mortgage statements.
  2. Show net realizable value: always present FMV and then deduct mortgages, liens, anticipated selling costs, and any legal or tax costs that reduce proceeds.
  3. Use professional appraisals when values are significant or likely to be disputed — especially for real estate and business interests.
  4. Be transparent: disclose all assets and associated liabilities. Omissions can lead to denial or reopening of an accepted offer.

Real-world examples (practice insight)

  • In my practice, a client with a condo overvalued by $40,000 initially had an RCP that made an OIC impractical. A CMA and documentation of needed repairs reduced the condo’s FMV and lowered the IRS’s RCP enough to secure an accepted offer.
  • For a small business owner, separating equipment liquidation value from going-concern value — supported by an equipment appraisal — prevented the IRS from attributing unrealistic marketable value to the business.

Documentation checklist (what to submit)

  • Form 656 (Offer in Compromise) and the required payment (see IRS instructions).
  • Completed Collection Information Statement (Form 433-A (OIC) or 433-B (OIC)) with supporting docs.
  • Appraisals, CMAs, vehicle value printouts, retirement account statements, mortgage/HELOC statements, business financials, and lien searches.

Common mistakes and how to avoid them

  • Overvaluing assets (inflated self-appraisal) — use third-party resources and conservative discounts for selling costs.
  • Under-reporting liabilities (forgetting HOA dues, tax liens, or business debt) — reconcile ledgers and include all encumbrances.
  • Skipping appraisals when asset values materially affect the offer — spend on an appraisal early if the asset is core to the computation.

Timing and process notes

  • Processing times vary; offers commonly take several months to a year depending on IRS workload and complexity. The IRS may return requests for additional documentation, which extends the timeline (IRS: Offer in Compromise).
  • Until the IRS accepts an OIC, collection activities can continue, but the IRS often suspends certain actions during active evaluation.

When valuation won’t help

  • If your RCP shows ample realizable equity compared to your tax debt, an OIC is unlikely to be accepted. In those cases, alternatives include installment agreements, currently not collectible status, or bankruptcy consultation.

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Professional disclaimer

This article is educational and does not constitute tax or legal advice. Tax situations are fact-specific; consult a qualified tax professional or CPA for guidance tailored to your circumstances.