When you owe more in back taxes than you could ever afford to pay, the IRS Offer in Compromise (OIC) program can feel like a lifeline. But one question matters most: how much should you offer the IRS in an OIC?
The wrong amount could mean a quick rejection, while the right calculation gives you a real shot at approval.
What the IRS Looks for in an Offer
The IRS is not interested in random numbers or lowball guesses. They use a strict formula called Reasonable Collection Potential (RCP). This represents what the IRS believes it can collect from you, based on two main factors:
- Net equity in assets — the value of what you own after subtracting loans or liens.
- Future income — your monthly disposable income multiplied by either 12 or 24 months, depending on which type of offer you make.
Understanding RCP is the key to making a credible offer.
How to Calculate Your Offer in Compromise Amount
Your offer should at least equal your RCP. Here’s how to calculate it step by step:
- List your assets. Include cash, vehicles, real estate, investments, and retirement accounts.
- Apply quick-sale value. The IRS usually values assets at about 80% of fair market value.
- Subtract loans or liens. For example, if your car is worth $15,000 but you owe $12,000, the IRS only counts $3,000 toward your RCP.
4. Calculate disposable income. Take monthly income, subtract allowable living expenses (based on IRS national/local standards), and the result is your disposable income.
5. Multiply future income.
- If you offer to pay in a lump sum within 5 months, multiply disposable income by 12.
- If you pay over 6–24 months, multiply by 24.
6. Add asset equity and future income. This is your RCP and the baseline for your offer.
Example:
- Assets after adjustments: $10,000
- Disposable income: $400 per month
- Lump sum option: $400 × 12 = $4,800
- RCP = $10,000 + $4,800 = $14,800
Your offer must be at least $14,800.
Why Low Offers Get Rejected
Submitting an offer far below your RCP almost guarantees denial. The IRS will see it as unrealistic and may even return your application as “unprocessable.”
A better approach is to calculate carefully, then round slightly up to account for any missing documentation or potential adjustments.
If your first offer is rejected, you can appeal within 30 days. We covered that process in detail in our previous blog on Offer in Compromise rejections.
Choosing the Right Payment Option
The payment option you select affects the size of your offer:
- Lump Sum Offer: Requires 20% down with the application and the rest paid in five or fewer installments. Uses the 12-month income multiplier.
- Periodic Payment Offer: Paid over 6–24 months while the IRS reviews your case. Uses the 24-month multiplier, which results in a higher total.
If you have access to funds, the lump sum path often makes more sense because the required offer is smaller.
Understanding IRS Allowable Expenses
When calculating disposable income, the IRS does not simply take your word for what you spend.
They rely on national and local standards to decide what counts as “necessary.” These categories include:
- Housing and utilities (with regional limits).
- Food, clothing, and household supplies (set by national standards).
- Out-of-pocket medical costs (limited amounts unless documented).
- Transportation costs (ownership and operating costs, set regionally).
One of the biggest mistakes taxpayers make is reporting actual expenses that exceed the IRS standard.
For example, if you pay $2,000 in rent but the IRS housing allowance in your area is $1,500, they may only allow $1,500 in the calculation.
Knowing these limits helps you plan your offer realistically.
Documentation Tips to Strengthen Your Offer
Form 433-A (for individuals) and Form 433-B (for businesses) are the backbone of an OIC application. Small mistakes here can sink an otherwise fair offer. Common errors include:
- Leaving out assets like small savings accounts or old vehicles.
- Failing to provide recent pay stubs or bank statements.
- Reporting expenses without proof, such as medical bills or childcare.
- Not updating financials if circumstances change during review.
Providing accurate, well-documented information shows the IRS you are serious and prevents unnecessary rejections or delays.
Professional vs. DIY Approach
Some taxpayers prefer to handle the OIC process on their own, especially if their finances are straightforward.
But calculating the right offer can get complicated when multiple income sources, businesses, or unusual assets are involved.
Professionals who work with the IRS regularly know how to present expenses within the IRS standards, how to support claims with documentation, and how to negotiate if the first offer is questioned.
While DIY is possible, expert tax guidance often improves approval odds and shortens the timeline.
Strategic Considerations Beyond the Formula
While the IRS formula sets the floor, strategy matters too:
- Document expenses carefully. Allowable expenses cover housing, utilities, food, transportation, and medical needs. Missing one can raise your calculated ability to pay.
- Consider future changes. If your income is likely to rise, it may increase your RCP. Applying sooner could work in your favor.
- Think about appeals. A slightly stronger initial offer can avoid months of back-and-forth.
What If You Cannot Meet the Minimum?
Some taxpayers find that their RCP is still higher than what they can reasonably pay. In those cases, it may be better to explore other programs:
- Installment Agreement: Pay in manageable monthly installments.
- Currently Not Collectible (CNC): Pause IRS collection if you can prove hardship.
- Penalty Abatement: Reduce penalties that are inflating your balance.
These alternatives do not erase debt as quickly as an OIC, but they may provide more realistic relief.
Connecting the Series
This article follows our guide on what to do if your offer in compromise is rejected. If you missed that post, it explains how to appeal or adjust after a denial. Once you know how to respond to rejection, the next step is understanding how to calculate an offer the IRS will actually accept.
Next, we’ll look at how long the IRS takes to review an Offer in Compromise. That post breaks down the typical timeline, from application to decision, and helps you set realistic expectations.
