What Is Reasonable Collection Potential (RCP)?
When you apply for an Offer in Compromise (OIC), the IRS needs to know what you can reasonably afford to pay toward your tax debt.
That calculation is called your Reasonable Collection Potential (RCP). It reflects your ability to pay based on income, expenses, assets, and financial obligations.
If your offer is lower than your RCP, the IRS is unlikely to accept it.
How the IRS Calculates RCP
1. Income
The IRS reviews all income sources, including wages, self-employment, rental income, and even potential earnings based on your skills or education.
2. Allowable Expenses
Not all expenses are considered. The IRS uses national and local standards for items like food, housing, transportation, and healthcare. If your actual spending is higher than the standard, the IRS may only allow the standard amount.
3. Assets
Cash, bank accounts, investments, vehicles, and real estate are included. The IRS calculates the equity value, what your assets are worth after subtracting loans or liens, and adds that to your RCP.
4. Future Income Potential
The IRS multiplies your monthly disposable income to estimate what you can pay over time. This calculation can be difficult, especially if your income fluctuates. Professional guidance, such as Audit Representation Services, can help protect you if the IRS challenges your reported numbers.
5. Other Obligations
Certain obligations such as child support or federally guaranteed student loans can also influence your RCP calculation.
Example: Calculating RCP in Practice
Imagine you earn $4,000 per month.
IRS allowable expenses total $3,200, leaving $800 in disposable income.
Over 12 months, that adds $9,600 to your RCP.
If you also have $5,000 in asset equity, your RCP is $14,600.
Any Offer in Compromise must meet or exceed this amount to be considered.
Why Accurate RCP Matters
Submitting an OIC without understanding RCP often leads to rejection. Key mistakes include:
- Overstating expenses the IRS won’t allow.
- Undervaluing assets that IRS records show are worth more.
- Failing to include future earning potential.
Accurate documentation and honest reporting are essential.
Tips for Strengthening Your OIC Application
- Be Accurate: Provide complete financial records such as pay stubs, bank statements, and tax returns.
- Document Hardship: Medical bills, unemployment, or natural disasters should be well documented.
- Seek Expert Help: Professionals can navigate forms like IRS Form 433-A(OIC) and Form 656.
- Be Patient: OIC reviews can take months. Respond promptly to IRS requests for information.
Understanding how to calculate your Reasonable Collection Potential is an essential step in preparing a strong Offer in Compromise, but knowing the math is only part of the process.
For many taxpayers, the bigger challenge is recognizing when it’s the right time to reach out for assistance.
If you’re already dealing with IRS notices, audits, or collections, see our post on When to Seek IRS Help to understand the warning signs that mean you shouldn’t wait any longer to take action.
Once you understand how the IRS values your assets and income, the next question is how to apply those insights to the broader relief options available.
In our next post, How to Get Tax Relief, we explore the different programs the IRS offers and explain how taxpayers can use them to reduce or manage what they owe.