What Is Reasonable Collection Potential for an Offer in Compromise?

What Is a Reasonable Collection Potential — And How Does the IRS Calculate it For an Offer in Compromise?

The offer in compromise is a compelling option for settling tax debt for less than the total owed — but trying for an OIC can be stressful enough to keep prospective applicants away.

At the center of this complication? A figure is known as the reasonable collection potential (RCP). This figure can determine whether your offer is ultimately accepted. Learn how it works — and how it can influence your application — below:

How Does the IRS Calculate the Reasonable Collection Potential?

At its most basic level, the RCP involves the amount the IRS assumes can actually be collected via an offer in compromise.

A variety of factors play into this figure, but in general, it’s determined based on information submitted via IRS Form 433 — the Collection Information Statement.

Key elements considered by the IRS include:

  • The quick sale value of assets (typically 80 percent of fair market value), otherwise known as the net realizable equity
  • Expected future income, after accounting for necessary living expenses. This is typically valued based on the most recent tax return.

What Happens When the Offer Is Less Than the RCP?

When in doubt, an offer in compromise should be, at minimum, equivalent to the RCP. Otherwise, the IRS is likely to reject the offer. In select cases, however, acceptance for lower OICs may still be possible under effective tax administration (ETA) cases. These sometimes provide more leeway.

Because the RCP can be so difficult to calculate, it’s safest to seek help from a tax expert who understands how to calculate this essential figure. Remember: accuracy is essential in all areas of an offer in compromise, but the RCP is especially important.

Don’t go it alone as you seek an IRS offer in compromise. The Highland Tax Group can help you get your offer accepted while also keeping the stress of this process to a minimum.