How the IRS Decides What to Accept
An offer in compromise settles a federal tax liability for less than the full amount. The authority is Internal Revenue Code section 7122, and the ground almost everyone uses is doubt as to collectibility, meaning your assets and future income are not enough to pay what you owe before the collection period runs out.
The IRS decides those cases with one number. It calculates your reasonable collection potential and it will not accept an offer below that figure. So the practical question is never whether the IRS is willing to negotiate. It is what your RCP comes to, and whether it is smaller than your debt.
If a final notice of intent to levy has already arrived, the offer can be raised at the collection due process hearing, and the levy stays on hold while Appeals considers it. The request for that hearing is due 30 days from the day after the notice date, so check that date before you finish the arithmetic below.
The formula has two components added together.
- The quick-sale value of your net asset equity. Each asset is valued at eighty percent of fair market value, then reduced by the secured debt against it.
- The present value of your future income stream. Your gross income minus IRS-allowable living expenses, multiplied by 12 for a lump sum offer or 24 for a periodic payment offer.
The multiplier is the part people miss, and it is worth understanding before you decide how to pay. A lump sum offer is one paid within five months of acceptance, and it counts only twelve months of your remaining income. A periodic payment offer, spread over six to twenty-four months, counts twenty-four months. Where you have $1,100 a month left after allowable expenses, that difference is $13,200 against $26,400 on the income side alone.
The Part That Sinks Most Self-Prepared Offers
The IRS does not use your actual spending. It uses its own Collection Financial Standards, which set national allowances for food, clothing and out-of-pocket healthcare, and local allowances for housing, utilities and transportation that vary by county and household size. Spend more than the standard and the excess usually does not count, unless you can show it is necessary for health and welfare or for producing income. Payments on secured debt are generally allowed at their actual amount.
This is where the arithmetic turns against a taxpayer who filled in the forms honestly. You enter what you really spend, the IRS recalculates with its smaller allowances, your monthly remainder goes up, your RCP goes up with it, and the offer gets rejected as too low. The calculator above asks for the allowable figure rather than your real one for exactly this reason. Getting those numbers right is most of the work in preparing an offer.
There is no homestead exemption here, which surprises Florida clients in particular. Florida homestead law protects a home from creditors and does a great deal of work elsewhere in the planning. It does nothing to the offer in compromise calculation. The IRS applies its own valuation rules, and equity in a Florida home shows up in RCP the same as equity anywhere else.
Two Things to Fix Before You File
The IRS will return an offer without processing it, rather than rejecting it on the merits, if your current-year returns are unfiled or your current-year estimated tax payments are unpaid. Get compliant first. An offer submitted while returns are outstanding costs you the fee and several months and never reaches an examiner.
The second thing is timing, and it runs in your favor. The IRS has twenty-four months from the date it receives your offer to accept or reject it. If it does not act within that window, section 7122(f) deems the offer accepted by operation of law. Straightforward cases resolve in six to twelve months, and business cases with several entities take longer, but the outer limit is real and worth knowing about.
If the Number Comes Back Too High
A calculation showing RCP above your tax debt means an offer based on collectibility is the wrong tool, and filing anyway costs you the application fee and most of a year. That is useful to learn in ten minutes rather than ten months. Other routes exist and some of them fit better.
One category deserves its own mention because the arithmetic above does not capture it. Where the debt is a trust fund recovery penalty assessed personally for a company's unpaid payroll taxes, there is usually an earlier and better fight available, and it runs on a 60-day clock from the notice of proposed assessment.
An installment agreement under section 6159 spreads the liability over time without requiring you to prove you cannot pay it. Currently not collectible status pauses collection where paying anything would leave you unable to meet basic living expenses. Penalty abatement can remove a substantial slice of what you owe where there was reasonable cause or where you qualify for first-time relief. And where the liability itself is wrong, an offer based on doubt as to liability challenges the assessment rather than your ability to pay. Which one fits depends on facts this calculator does not ask about.
Frequently Asked Questions
What Is Reasonable Collection Potential?
Reasonable collection potential, usually shortened to RCP, is the amount the IRS calculates it could collect from you before your collection window closes. It has two parts added together. The first is the equity in what you own, valued at a quick-sale figure rather than what you think the property is worth. The second is your future income, meaning what is left each month after allowable living expenses, multiplied by either 12 or 24 depending on how you plan to pay. The IRS will not accept an offer below your RCP on a doubt-as-to-collectibility basis, which makes RCP the number that decides whether an offer is worth filing at all.
Why Does the IRS Value My House at 80 Percent?
The IRS values assets at quick-sale value, which it treats as eighty percent of fair market value, on the theory that a forced or expedited sale brings less than a patient one. You then subtract what is actually owed against the asset. A house worth $400,000 with a $250,000 mortgage does not contribute $150,000 to your RCP. It contributes $320,000 minus $250,000, which is $70,000. This works in your favor on encumbered property and is one of the reasons a homeowner with a large mortgage can sometimes qualify when the raw numbers suggest otherwise.
Should I Choose the Lump Sum or the Periodic Payment Option?
Run both, because the arithmetic pushes in opposite directions. A lump sum offer, meaning one paid within five months of acceptance, counts only 12 months of your future income. A periodic payment offer, paid over six to twenty-four months, counts 24 months. So the lump sum almost always produces a lower total offer amount, sometimes dramatically lower where you have meaningful monthly income left over. The catch is that you have to be able to raise that money quickly. The calculator shows both so you can see what the speed is actually buying you.
What Counts as an Allowable Living Expense?
The IRS does not accept your actual spending. It applies its own Collection Financial Standards, which set national allowances for food, clothing and out-of-pocket healthcare, and local allowances for housing, utilities and transportation that vary by county and family size. Where you spend more than the standard, the excess usually does not count unless you can show it is necessary for health and welfare or the production of income. Payments on secured debt are generally allowed at the actual amount. This is where most self-prepared offers go wrong, because the taxpayer enters real spending and the IRS recalculates with smaller numbers, which raises RCP and gets the offer rejected.
Are There Exemptions Like the Florida Homestead?
No. There are no categorical exemptions in the offer in compromise calculation analogous to Florida’s homestead protection. Florida homestead law protects a home from creditors, and it does a great deal of work in other contexts, but the IRS applies its own Collection Financial Standards for living expenses and its own valuation rules for assets. A Florida homeowner with substantial equity should expect that equity to appear in RCP, and should plan the offer around that rather than around the state exemption.
What if My RCP Is Higher Than What I Owe?
Then a doubt-as-to-collectibility offer is not your remedy, and filing one is a waste of the fee and several months. The IRS position is that it can collect the full amount, so it has no reason to compromise. That is not the end of the options. An installment agreement, currently not collectible status, penalty abatement, or in the right case an offer based on doubt as to liability or on effective tax administration may fit instead. The value of running this calculation early is finding that out before you spend the year waiting on an offer that was never going to be accepted.
Does the IRS Count My Retirement Account?
Generally yes, as an asset, though how it is valued depends on whether you can access it and what it would cost you to do so. A retirement account you could liquidate is treated as an asset with equity, reduced for the tax and any early withdrawal penalty that liquidation would trigger. An account you genuinely cannot access, or income you are already drawing from it, is treated differently and can end up in the income side of the calculation rather than the asset side. Retirement is one of the places where the difference between a self-prepared offer and a represented one shows up most clearly in the final number.
How Long Does an Offer Take?
Straightforward collectibility offers commonly resolve in six to twelve months. Cases with a business, multiple entities or a substantial asset schedule take longer. There is an outer limit that works in your favor: the IRS has twenty-four months from the date it receives the offer to accept or reject it, and if it does not act within that period the offer is deemed accepted by operation of law. One thing will stop the clock before it starts. The IRS returns an offer without processing it if your current-year returns are unfiled or your current-year estimated taxes are unpaid, so compliance has to be clean before you submit.
Can You Represent Me if I Do Not Live in Florida?
Yes. An offer in compromise is a federal matter under Internal Revenue Code section 7122, handled before the IRS rather than in a state court, and an attorney admitted in any state may represent a taxpayer before the IRS. Most of our estate and probate work is Florida-specific and stays that way. Federal tax controversy does not, which is why this page is not written as a Florida page. If you are outside Florida and have a collection problem, the consult works the same way.
How This Calculator Works
The arithmetic follows the reasonable collection potential formula. Real estate, vehicles and other property are taken at eighty percent of the value you enter, then reduced by the debt you enter against them, with each category floored at zero so negative equity in one asset does not offset another. Bank and cash balances are counted in full. Retirement balances are counted at the accessible amount you enter, and the note under your result flags that liquidation tax and penalties can reduce that figure in a real case.
The income component is your gross monthly income minus the allowable expense figure you supply, multiplied by 12 for the lump sum result and 24 for the periodic result. Where allowable expenses exceed income the remainder is treated as zero rather than negative.
Two limits are worth stating plainly. This calculator does not apply the IRS Collection Financial Standards for you, because those figures change annually and are set by county and household size, so an accurate result depends on you pulling the current numbers from the IRS. And it does not model dissipated assets, transfers within the look-back period, or the special valuation questions that come up with business interests and retirement accounts, all of which can move the final number in a real case.
Sources of Law
- 26 U.S.C. §7122 (authority to compromise; §7122(f), an offer not acted on within 24 months of submission is deemed accepted).
- IRS Collection Financial Standards (national standards for food, clothing and out-of-pocket healthcare; local standards for housing, utilities and transportation). Figures change annually and are not reproduced on this page.
- IRS Form 656-B, Offer in Compromise Booklet, and Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals (asset valuation at quick-sale value and the future income multipliers of 12 months for a lump sum offer and 24 months for a periodic payment offer).
- 26 U.S.C. §6159 (installment agreements, the alternative where reasonable collection potential exceeds the liability).
Updated on August 21, 2026. Reviewed by Kevin D. Klagge, Esq., Fla. Bar No. 99502. Attorney Kevin Klagge represents families, businesses, and international clients in estate and tax planning, business structuring, and international law, with a focus on Florida legal tools. He litigates estate and business issues in court. This calculator is general information about federal tax procedure, not legal or tax advice, and no attorney-client relationship is created. It produces an estimate from figures you supply and does not apply the IRS Collection Financial Standards for you. Your actual reasonable collection potential depends on facts and valuations this page does not capture. Do not send confidential information until we have agreed to represent you.
More Guides on International Tax Planning
This guide is part of International Tax Planning.