How to Calculate Your RCP for an IRS Offer in Compromise

Written by Evan wolf | Feb 17, 2026 7:11:50 PM

If you’ve heard that an Offer in Compromise (OIC) is a "math program" rather than a "negotiation program," you’ve heard correctly. The IRS doesn't accept an offer based on how much you want to pay; they accept it based on your Reasonable Collection Potential (RCP).

In 2026, understanding this formula is more critical than ever, as inflation adjustments have changed the "National Standards" the IRS uses to evaluate your life. Here is the step-by-step breakdown of the RCP formula.

The Golden Equation of the OIC

The IRS uses a specific formula to determine the minimum amount they are willing to accept. If your offer is a penny less than this number, it will likely be rejected.

RCP = Net Realizable Equity (NRE) in Assets + Future Income
 

Step 1: Calculate Net Realizable Equity (NRE)

The IRS doesn't look at what your stuff is "worth" on paper; they look at Quick Sale Value (QSV). This is generally 80% of the Fair Market Value (FMV).

How the IRS Values Common Assets in 2026:

  • Real Estate: FMV x 0.80 - Mortgage Balance = Equity. (Note: If you have a $500k home with a $450k mortgage, the IRS sees $0 equity because 80% of $500k is $400k, which is less than the debt.

  • Vehicles: The IRS applies a $3,450 exemption (for 2026) per vehicle (up to two) after calculating the QSV and subtracting loans.

  • Bank Accounts: The IRS typically allows a $1,000 cash cushion to be excluded from your total liquid assets.

Step 2: Calculate Monthly Disposable Income (MDI)

This is where most taxpayers fail. The IRS does not care what you actually spend on organic groceries or your premium cable package. They use National and Local Standards.

MDI Formula:

Gross Monthly Income - Allowable Living Expenses = MDI
 
 

2026 National Standard Highlights (Family of 4):

  • Food & Clothing: The IRS now allows $1,255/month for a family of four, regardless of your actual receipts.

  • Out-of-Pocket Healthcare: For 2026, the standard is $84/month for those under 65 and $149/month for those 65+.

  • Housing & Utilities: These are set locally by county. In high-cost areas like New York or San Francisco, these caps are significantly higher than in rural regions.

Step 3: Factor in "Future Income"

How long you plan to take to pay your offer determines how much of your future income the IRS "claims."

  1. Lump Sum Offer (5 months or less): Multiply your MDI by 12.
  2. Periodic Payment (6 to 24 months): Multiply your MDI by 24.

Example: If your MDI is $500 and you have $10,000 in asset equity:

  • Lump Sum Minimum: $10,000 + ($500 \times 12) = $16,000
  • Periodic Minimum: $10,000 + ($500 \times 24) = $22,000

Common "RCP" Pitfalls to Avoid

  • Dissipated Assets: If you sold a boat or emptied a 401k to pay for a vacation six months before filing, the IRS will "add back" that value to your RCP as if you still had the money.

  • Optional Deductions: The IRS adds back 401k contributions and voluntary life insurance to your income. They view your tax debt as a higher priority than your retirement savings.

  • Non-Liable Household Income: If you live with a spouse who isn't liable for the debt, the IRS still looks at their income to determine your "pro-rata" share of household expenses.

Why Professional Forensic Analysis Matters

Calculating RCP is not a "DIY" project. One miscalculation on a vehicle loan or a housing standard can lead to an offer that is thousands of dollars higher than it needs to be—or a rejection that wastes months of your time.

At Wolf Tax, we perform a "Mock OIC Investigation" using the same software and standards as IRS agents. We find the "sweet spot" in your RCP to ensure your offer is the lowest legal amount possible.
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