What Is Reasonable Collection Potential (RCP)?

RCP has two parts:

• Net realizable equity in assets: the quick-sale value of what you own (generally 80% of fair market value) minus loans secured by it. This includes bank accounts, retirement accounts (after tax and penalty), vehicles, real estate, and business assets.
• Future remaining income: your average monthly income minus allowable living expenses, multiplied by 12 for a lump-sum offer (paid in 5 or fewer installments) or 24 for a periodic-payment offer.

The IRS uses Form 433-A (OIC) for individuals and 433-B (OIC) for businesses to gather this information.

The IRS uses Collection Financial Standards: national standards for food, clothing and personal care; local standards for housing, utilities and transportation by county; and national standards for out-of-pocket health care. You can claim actual amounts for health insurance, court-ordered payments, child care required for work, and current tax payments. If your actual housing or transportation costs exceed the standard, the IRS usually allows only the standard unless you can show why more is necessary.

Say you owe $40,000, have $3,000 in the bank, a car worth $12,000 with a $9,000 loan, no home equity, and $300 a month left over after allowable expenses.

• Bank account: $3,000 (less a small allowance the IRS may exclude).
• Car: 80% × $12,000 = $9,600, minus $9,000 loan = $600 (the IRS may also allow a vehicle exclusion).
• Future income, lump sum: $300 × 12 = $3,600.
• Approximate RCP: about $7,200.

Because $7,200 is far below $40,000, an offer around that amount could be realistic. If your leftover income were $800 a month, future income alone would be $9,600 — and a payment plan might be a better fit. Run your own estimate with the Offer in Compromise estimator.

Rarely. The two exceptions are effective tax administration offers — where paying in full would cause economic hardship or be unfair despite your ability to pay — and doubt-as-to-liability offers, which dispute the tax itself. Special circumstances like serious illness or advanced age can also reduce the asset and income figures the IRS uses.

The Form 656 application fee is $205. A lump-sum offer requires 20% of the offer amount with the application; a periodic offer requires the first proposed monthly payment and continued payments while the IRS considers it. Both are waived for applicants who meet the low-income certification in the Form 656 booklet. Payments generally aren't refundable if the offer is rejected — they're applied to your balance. See the IRS Offer in Compromise page.

• Leaving out an asset — the IRS checks property, vehicle and bank records.
• Claiming expenses above the Collection Financial Standards without documentation.
• Using a temporary low-income month as your "average" income.
• Not being current on estimated tax payments or this year's filing.
• Forgetting that the IRS keeps any refund for the year your offer is accepted.

An offer built on accurate, documented numbers is far more likely to be accepted than one that simply asks for a low amount.

An offer makes sense when your RCP is well below your balance and you're current on filing and estimated payments. If RCP is close to what you owe, a payment plan is usually faster and cheaper. If you have no disposable income at all, Currently Not Collectible status may fit better.

When you know where you stand, the next step is choosing a resolution. Our tax settlement calculator asks 8 questions about your balance, income and situation and shows which IRS programs — payment plan, Offer in Compromise, Currently Not Collectible or penalty abatement — your answers point toward. It's free and doesn't affect your credit.