The Internal Revenue Service (IRS) offers a possible solution for taxpayers struggling to pay tax debt, known as the Offer in Compromise program (OIC). This program can allow you to settle your tax debt for less than you owe, but only if you qualify. To decide, the IRS uses Reasonable Collection Potential (RCP) to determine the taxpayer’s ability to pay and decide whether to accept their Offer in Compromise.
Want the IRS to accept your Offer in Compromise? Our team at Victory Tax Lawyers is ready to help you calculate your RCP, provide solid proof, and guide you through every step. Schedule a consultation with us today.
If you want to understand how the IRS calculates Reasonable Collection Potential for an Offer in Compromise, this article explains the process, key factors, and how to present your offer for better chances of approval.
What Is Reasonable Collection Potential?
Under federal tax law, RCP is the IRS’s estimate of how much you can realistically pay toward your tax debt. It includes your current and future income, the equity in your assets, and any other sources of collection the IRS can lawfully pursue.
This concept is central to the IRS’s decision to accept or reject an Offer in Compromise. If your offer is less than your RCP, the IRS is likely to reject it. If your offer meets or exceeds your RCP, and you’ve met other requirements, the IRS may consider it.
The agency calculates RCP based on strict guidelines set in the IRS Internal Revenue Manual (IRM). These rules help ensure that each taxpayer is evaluated consistently, taking into account necessary living expenses, asset equity, and future income potential.
Why Reasonable Collection Potential Matters
Your RCP directly influences the minimum amount you must offer in an Offer in Compromise (OIC). Even if you owe tens of thousands in back taxes, the IRS won’t necessarily expect full repayment. Instead, they focus on what you can actually afford to pay after accounting for your assets, income, and basic living expenses. If your RCP is lower than what you owe, or if paying your full tax debt would cause economic hardship, you may qualify for an Offer in Compromise.
This implies that the amount you offer doesn’t necessarily have to equal your total tax debt. It only needs to meet or exceed your RCP. But if your offer falls short of what the IRS calculates as your RCP, they’ll reject your OIC outright.
Furthermore, your OIC depends on RCP. It determines your offer amount, and it shapes the IRS’s decision. Misjudge it, and you waste time and money. Calculate it accurately, and you may walk away with a clean slate.
What the IRS Looks At When Calculating RCP
Before approving an OIC, the IRS evaluates what you can realistically afford to pay. Let’s break down the key components the IRS considers when calculating RCP:
1. Assets
The taxpayer’s assets are the first thing the IRS reviews. This includes anything with financial value that can be sold, liquidated, or tapped into.
- Real estate: The IRS considers the quick sale value (generally 80% of fair market value) minus any outstanding mortgages.
- Vehicles: This includes cars, trucks, motorcycles, and even boats. The IRS applies a quick sale discount here as well and subtracts any loan balance.
- Bank accounts: Checking, savings, and online banking accounts are fair game. The IRS typically includes any balance above $1,000.
- Retirement and investment accounts: 401(k)s, IRAs, and brokerage accounts count toward your equity. Early withdrawal penalties are also considered.
- Business assets (if self-employed): Tools, inventory, and equipment essential to income-producing activities are reviewed. In some cases, the IRS allows exclusions if selling them would halt business operations.
2. Future Income
In addition to what you have, the IRS wants to know what you’ll earn. The IRS calculates your monthly disposable income (what’s left after allowable expenses) and multiplies it by:
- 12 months for a lump sum OIC
- 24 months for a periodic payment OIC
This formula helps them estimate how much you could pay over time, even if your current cash is low. This calculation includes anticipated future income, not just your current earnings,
3. Allowable Expenses
Not all your spending counts against what you can offer. The IRS has strict guidelines around what qualifies as a “necessary” or allowable expense.
- National Standards: These cover food, clothing, personal care, and miscellaneous items. The limits are set based on household size.
- Local Standards: These apply to housing and utilities, as well as vehicle ownership and operation. They usually vary by ZIP code.
- Special circumstances: If you’re caring for dependents, facing medical hardship, or dealing with other economic challenges, the IRS may make exceptions and allow higher expenses.
How Do You Calculate Reasonable Collection Potential?
Calculating your RCP involves a combination of your assets, income, and allowable expenses. Here’s how the process works:
Step 1: Gather All Financial Documents
Start by collecting your recent financial records. This includes pay stubs, bank statements, tax returns, mortgage or car loan balances, and the current value of any assets that you own.
Step 2: Calculate Monthly Net Income
Next, determine your monthly income. Add up all income sources. That will be your wages, self-employment, rental income, or any side income. Then subtract allowable living expenses using the IRS’s national and local standards. What’s left is your disposable monthly income.
Step 3: Determine the Value of Your Assets
Now, evaluate what you own. For each asset, use the quick sale value and subtract any loan balances. This applies to real estate, cars, bank accounts, retirement funds, and business equipment if you’re self-employed.
Step 4: Project Your Future Income
The IRS uses your disposable monthly income to project your future ability to pay. If you are submitting a lump-sum offer, this amount is multiplied by 12 because the IRS assumes you could contribute that income over the next year. If you are proposing a periodic payment plan, it is multiplied by 24 to reflect your ability to pay over two years, since these offers typically extend across a longer timeframe.
Step 5: Add Assets and Future Income
Once you have both numbers, add them together. The total of your asset equity and projected future income is your Reasonable Collection Potential.
Step 6: Compare Your RCP to the Tax Debt
Finally, compare your RCP to your total tax liability. If your RCP is lower than the amount you owe, you may be a strong candidate for an Offer in Compromise.
How to Lower Your Reasonable Collection Potential
Here’s how to lower your RCP strategically and legally:
1. Provide Strong Documentation for Expenses
The IRS only allows specific expenses based on its national and local standards. But you may be able to go beyond those limits if you can prove exceptional circumstances. Submit detailed records of recurring costs like medical bills, childcare, or necessary support for dependents. The better your documentation, the more likely the IRS is to accept reduced disposable income.
2. Legally Minimize Asset and Income Exposure
Reducing RCP doesn’t mean hiding assets. It means knowing what the IRS counts and how they calculate it. For instance, if a vehicle is necessary for work, you may be able to claim a higher exemption. If your home has little equity after accounting for loans and quick-sale value, show it. On the income side, we use accurate but conservative estimates for self-employment income.
3. Work With a Qualified Tax Attorney
An experienced attorney can help reduce your RCP in a way that meets IRS expectations. They’re especially valuable if you have high-dollar debt, complicated assets, or inconsistent income.
If you’re unsure about involving a tax attorney, why not consult with one of our licensed tax attorneys at Victory Tax Lawyers? We offer free consultations, and the results could be highly beneficial for you.
What to Do if the IRS Rejects Your OIC Based on RCP
If the IRS rejects your Offer in Compromise because your Reasonable Collection Potential is too high, you’re not out of options. First, know that you have the right to appeal the decision. The IRS will send you a written notice explaining why your offer was denied. You typically have 30 days after that to file an appeal using Form 13711. This gives you a chance to present new documentation, clarify your financial picture, or challenge the IRS’s calculations.
You can also amend your original offer. Maybe your financial situation has changed, or maybe you overlooked allowable expenses or failed to provide enough evidence. Revising your offer with updated numbers can put you in a better position the second time around. It is advisable to consult a tax attorney for this.
If an amended offer still isn’t viable, don’t panic. You have other routes to manage and ensure you fully pay your tax debt. You might qualify for an Installment Agreement, which lets you make installment payments to pay off your balance. If you’re truly unable to pay anything, ‘Currently Not Collectible’ (CNC) status could temporarily pause collection efforts. In extreme cases, bankruptcy may be worth exploring, though it’s a more complex and serious option that comes with long-term consequences.
When to Hire a Tax Attorney
There are times when handling an Offer in Compromise on your own just isn’t worth the risk. If you have complicated assets, irregular or high income, or if you’ve already had an OIC rejected, it’s time to call in a professional.
An experienced tax professional knows how to present your financials clearly, legally reduce your Reasonable Collection Potential, and negotiate on your behalf to increase your odds of success. More importantly, they can protect your rights while saving you time, stress, and potentially thousands of dollars.
Need Legal Guidance Before Making Your IRS Offer?
Before you send anything to the IRS, make sure you’re working with accurate numbers. A single misstep in calculating your Reasonable Collection Potential (RCP) could lead to a rejected offer or a much higher payment than necessary. Victory Tax Lawyers’ experienced tax attorneys know exactly how the IRS works — and how to use the law to lower your payment and protect your assets.
We’ve helped countless taxpayers successfully negotiate with the IRS, even after rejections. With our proven strategies, you’ll avoid costly mistakes, speed up the process, and gain the peace of mind that comes from having a legal expert on your side.
Don’t attempt to navigate an IRS offer without guidance. Let a tax attorney from Victory Tax Lawyers help you lower your RCP and increase your chances. Call us today and speak directly with a tax attorney.
FAQ
Still have questions about how the IRS determines what you can pay? Here are some of the most common questions about Reasonable Collection Potential:
Can I Negotiate My RCP With the IRS?
Yes, but only with solid documentation. If you can prove that the IRS overestimated your income or assets or failed to consider living expenses, you may be able to challenge their calculation. A tax attorney can negotiate on your behalf and help present a stronger case.
How Often Does the IRS Accept an OIC?
On average, the IRS approves less than 40% of all Offer in Compromise applications. Success often depends on how accurately your Reasonable Collection Potential (RCP) is calculated and whether your offer is truly reflective of your ability to pay.
Does RCP Include My Spouse’s Income?
If you live in a community property state or file jointly, your spouse’s income may be included in the Reasonable Collection Potential (RCP) calculation. Even in separate filings, the IRS can consider household income unless clearly separated.
What Happens if I Lie on the OIC Forms?
Intentionally providing false information can lead to immediate rejection of your offer and serious legal consequences. Always be honest and transparent. If you’re unsure how to report something, consult a tax attorney.
How Does Reasonable Collection Potential Affect Credit Scores?
The RCP itself doesn’t impact your credit score, but the outcome of your OIC might. If accepted, the settlement could show as “settled for less than owed,” depending on how it’s reported.
Are There Laws Governing Reasonable Collection Potential?
Yes. The IRS follows internal guidelines outlined in the Internal Revenue Manual (IRM). While these aren’t public laws, they guide how collection officers assess offers and Reasonable Collection Potential. A qualified tax attorney understands these rules and can use them to your advantage.
How Does the IRS Calculate RCP?
The IRS calculates the quick-sale value of your assets. Then, it adds a multiple of your monthly disposable income. This multiple can be 12 or 24 months, depending on the type of offer. The IRS also considers anticipated future income based on employment history, industry outlook, and any upcoming financial changes. This total becomes your Reasonable Collection Potential. If your offer is below this amount, it’s likely to be rejected.
How Much Should I Offer for an Offer in Compromise?
Your offer should be at or above your calculated RCP. Offering less without justification will almost always lead to rejection. A tax attorney can help you get that number right and advise on the best strategy to succeed.
