When you apply for an Offer in Compromise (OIC), a payment plan, or Currently Not Collectible (CNC) status, the IRS doesn’t just take your word for what you can afford. It performs a detailed financial review to calculate your Reasonable Collection Potential (RCP) — an estimate of how much the IRS can realistically collect from you through income and assets.
Understanding how this number is calculated helps you negotiate smarter, avoid unrealistic payment plans, and improve your chances of approval for tax relief programs.
📘 Official Resource: IRS Collection Financial Standards
What Is “Reasonable Collection Potential” (RCP)?
Your RCP equals the IRS’s estimate of:
(Quick-sale value of assets + future income minus allowable living expenses) = Reasonable Collection Potential
This formula dictates whether the IRS will:
- Approve an Offer in Compromise (settle for less),
- Approve an Installment Agreement (monthly payments), or
- Declare your account Currently Not Collectible.
How the IRS Calculates What You Can Afford to Pay?
Step 1: Analyzing Your Assets
The IRS examines the quick-sale value (typically 80 % of fair market value) of:
- Bank accounts and cash on hand
- Vehicles and real estate equity
- Investments (stocks, crypto, retirement accounts)
- Business assets if self-employed
Only the equity portion (after debts) counts toward RCP. Certain assets — like small tools of trade or basic household items — are excluded.
Step 2: Calculating Your Monthly Income
The IRS adds up all household income sources:
- Wages or salary
- Self-employment income
- Social Security or pension
- Rental income
- Side gigs or freelance work
Step 3: Determining Allowable Living Expenses
Then, the IRS subtracts only allowable living expenses, defined by IRS Collection Financial Standards.
📘 Official Standards: National Standards for Food, Clothing & Miscellaneous Expenses
📘 Local Standards for Housing & Utilities
📘 Transportation Standards
Step 4: Future Income Multiplier
For Offers in Compromise, the IRS projects future income using multipliers based on payment method:
- Lump Sum OIC: 12 × monthly disposable income
- Periodic OIC (Payment Plan): 24 × monthly disposable income
📘 Reference: IRS Form 656-B — Offer in Compromise Booklet
Step 5: Totaling Your Reasonable Collection Potential
Finally:
Asset Value + Future Income Value = RCP (Reasonable Collection Potential)
Your OIC offer must generally equal or exceed this amount. If it doesn’t, the IRS will reject it as too low.
How This Affects Payment Plans and Hardship Requests?
Installment Agreements: The IRS uses the same financial data to set monthly payments. (Payment Plans & Installment Agreements)
Currently Not Collectible: If your income doesn’t cover basic living expenses, the IRS can grant CNC status. (Currently Not Collectible Program)
Offer in Compromise: Your offer must reflect RCP; otherwise it will be returned as “not processable.” (Offer in Compromise)
Common Errors Taxpayers Make
- Overstating income or understating expenses without proof
- Submitting incomplete Form 433-A or 433-B
- Offering too little in an OIC
- Missing deadlines for supporting documents
These mistakes can delay your case or cause automatic denial. Always verify the numbers with a tax professional.
How a Tax Attorney Helps During IRS Financial Review?
A tax attorney can:
- Review and adjust your RCP calculation to accurately reflect your situation.
- Argue for additional allowable expenses (e.g., child care, medical needs).
- Negotiate a payment plan you can actually afford.
- File appeals if the IRS denies an unrealistic agreement.
- Ensure all communication flows through your legal representative via Form 2848 (Power of Attorney)
Need help with a similar issue? Contact our firm today for a consultation.
When you owe the IRS, what you can afford to pay is determined by mathematics and federal guidelines — not guesswork. Knowing how the IRS calculates your Reasonable Collection Potential empowers you to propose realistic offers and avoid over-promising on payment plans.
If you need help navigating an Offer in Compromise, Installment Agreement, or CNC request, contact Pelham PLLC. We’ll analyze your IRS financial profile, defend your rights, and negotiate a solution that reflects what you can truly afford.
📘 Official Resource: IRS Collection Financial Standards Homepage
FAQs
How does the IRS decide what I can afford to pay?
By calculating your Reasonable Collection Potential, based on your assets, income, and standardized living expenses.
What if my expenses are higher than IRS standards?
You can submit documentation showing why (e.g., medical bills or regional cost differences). The IRS may allow some exceptions.
How is this used in an Offer in Compromise?
The IRS adds your asset value plus 12 or 24 months of future income to set your minimum acceptable offer.
Can I negotiate with the IRS if I disagree with their calculation?
Yes. You or your representative can appeal a denial or submit additional financial proof. Representation is recommended.
How often can I update my financial information?
Anytime your income or expenses change significantly. Updates can reduce your payment or qualify you for CNC status.
