The Formula: Reasonable Collection Potential (RCP)
The IRS calculates the minimum acceptable offer as your Reasonable Collection Potential, which is: (Net realizable equity in your assets) + (Future income value). Future income value equals your monthly disposable income times 12 (for a lump-sum offer paid within 5 months) or times 24 (for a periodic payment offer paid within 24 months). Offering less than RCP is almost always rejected.
Calculating Net Realizable Equity
For each asset, take the fair market value, multiply by 0.80 (the IRS 'quick sale' value), then subtract any loan balance. Example: a car worth $15,000 with a $10,000 loan: ($15,000 × 0.80) − $10,000 = $2,000 of equity. Apply this to vehicles, real estate, retirement accounts (with some caveats), bank accounts, and business assets.
Calculating Monthly Disposable Income
Total household income minus allowable monthly expenses. The IRS uses national and local standards for food, clothing, housing, transportation, and out-of-pocket healthcare — not your actual spending. If your actual housing or transportation cost exceeds the local standard, the IRS uses the lower number. This is where most offers go wrong.
Worked Example
Taxpayer owes $50,000. Equity in assets: $5,000. Monthly disposable income after IRS standards: $300. Lump-sum offer minimum: $5,000 + ($300 × 12) = $8,600. Periodic payment offer minimum: $5,000 + ($300 × 24) = $12,200. Either offer would likely be accepted; offering $3,000 would not.
When the Offer Can Be Lower
Two narrow paths: Doubt as to Liability (you don't actually owe the tax), or Effective Tax Administration (paying the full RCP would create economic hardship or be unfair due to special circumstances — serious illness, advanced age, etc.). These require strong documentation and are rarely the right fit.
Don't Forget the Application Fee and Initial Payment
A non-refundable $205 application fee plus 20% of a lump-sum offer (or first periodic payment) is required upfront. Low-income certification waives both. If your offer is rejected, the initial payment is applied to your tax debt — not refunded.
Get a Realistic Pre-Qualification
The IRS publishes a free Offer in Compromise Pre-Qualifier tool. A licensed enrolled agent, CPA, or tax attorney can run a more accurate calculation and tell you whether an OIC, installment agreement, or Currently Not Collectible status is the best fit. Be skeptical of any company quoting a low settlement before reviewing your full financials.
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Frequently Asked Questions
What is Reasonable Collection Potential?
RCP is the IRS's calculation of what they could collect from you. It equals the net realizable equity in your assets plus your future income (monthly disposable income times 12 for lump-sum offers, or times 24 for periodic payment offers).
Will the IRS accept a low offer?
The IRS typically rejects offers below RCP. The 'pennies on the dollar' outcomes you see advertised almost always involve taxpayers with very low income, minimal assets, and high allowable expenses — not the average filer.
What if my offer is rejected?
You can appeal within 30 days, restructure the offer, or pivot to other resolution paths like an installment agreement, Currently Not Collectible status, or partial-payment installment agreement.
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