IRS Collection Financial Standards: RCP and Resolution Options

The IRS Collection Financial Standards are fixed monthly allowances for basic living expenses — food, housing, transportation, health care, and a handful of other essentials — that the IRS subtracts from your income to figure out how much you can realistically pay toward back taxes. Whatever is left after those allowances is your monthly disposable income, and that number determines whether you qualify for an installment agreement, an Offer in Compromise, or a temporary pause on collection. Two people with similar finances get similar treatment because the allowances, not your actual spending, drive the math.

The Four Standards and the 2026 Amounts

The standards come in four groupings. Two are national, set the same everywhere. Two are local, tied to where you live.

National Standards for Everyday Expenses

The IRS bundles five categories — food, housekeeping supplies, clothing, personal care, and miscellaneous — into a single monthly allowance based on household size. For 2026, the totals are $839 for one person, $1,481 for two, $1,753 for three, and $2,129 for four, with $394 added for each additional person. Food alone accounts for $497 of the one-person figure and $1,255 for a household of four.¹

You get the full amount for your family size even if you actually spend less. The IRS won’t cut your allowance because you eat cheaply or skip haircuts.¹

Out-of-Pocket Health Care

Medical costs sit in a separate national standard. For 2026, the IRS allows $84 per month for each person under 65 and $149 per month for each person 65 or older. That covers prescriptions, copays, eyeglasses, and similar out-of-pocket costs, and it applies on top of what you pay for health insurance premiums.²

If your real medical costs run higher, the IRS can allow the actual amount, but you have to prove it with bills, receipts, or statements showing recurring expenses. Elective procedures like cosmetic surgery generally don’t count.²

Local Standards for Housing and Utilities

Housing varies too much by location to use a single national figure, so the IRS publishes county-level caps based on household size, drawn from Census Bureau and Bureau of Labor Statistics data. The allowance covers rent or mortgage, property taxes, insurance, maintenance, and utilities including electricity, water, gas, heating oil, phone, internet, and cable.³

Housing works differently from the national categories. You get the lesser of what you actually pay or the local cap. Rent above the cap gets trimmed to the cap. Rent below the cap only counts at your actual amount. No padding.³

Local Standards for Transportation

Transportation splits into two pieces. Ownership costs cover loan or lease payments and are set nationally: $662 per month for one vehicle, $1,324 for two. Operating costs cover fuel, insurance, registration, maintenance, and repairs, and they vary by census region. The 2026 monthly operating allowances for one vehicle are $302 in the Northeast, $259 in the Midwest, $281 in the South, and $297 in the West.⁴

If you own your car outright with no payment, the ownership allowance disappears and you get only the operating portion. If you use both a car and public transit, the IRS can allow expenses for both, but only when both are genuinely needed for health, welfare, or income. As with housing, the allowance is capped at the lesser of your actual cost or the standard.³

How the Standards Apply to Your Actual Expenses

The rule most people miss: national standard categories give you the full allowance regardless of actual spending, but local standards (housing and transportation) give you the lesser of what you actually pay or the cap. Real expenses above a cap get trimmed unless you can document that the higher amount is necessary. Real expenses below a cap don’t get rounded up.

That asymmetry is where disputes usually start. People assume their monthly bank statements determine their ability to pay. The IRS draws a line between what you choose to spend and what the standards say you need to spend.

Necessary, Conditional, and Excluded Expenses

Beyond the four standards, two more tiers of expenses can reduce your calculated ability to pay.

Other necessary expenses are costs the IRS routinely allows when reasonable: child care, court-ordered payments like alimony or child support, dependent care for elderly or disabled family members, term life insurance, and accounting fees for IRS representation. There’s no standardized table; the IRS looks at your actual costs and decides whether the amount makes sense.⁵

Other conditional expenses are costs that wouldn’t normally pass the “necessary for health, welfare, or income production” test but might be allowed in certain circumstances. Student loan payments, credit card minimums, and some education costs sit here. Whether the IRS allows them often depends on qualifying for special rules like the six-year rule for installment agreements. If you don’t qualify, these expenses get stripped from your calculation and your disposable income goes up.⁵

Expenses the IRS almost never allows: charitable donations (unless required by your employer), private school tuition when public school is available, and payments on unsecured debts that aren’t court-ordered.

How Disposable Income and Assets Combine Into RCP

The IRS measures your ability to pay through Reasonable Collection Potential, or RCP. RCP has two parts: what you can pay from future monthly income, and what you could generate from your assets.⁶

Monthly Disposable Income

Start with gross monthly income, subtract all allowable expenses under the standards and other categories above, and you have monthly disposable income. Earn $5,500 a month with $4,800 in allowable expenses and your disposable income is $700. The IRS then multiplies that figure by a set number of months to project total future collection. For an Offer in Compromise, a lump-sum proposal (paid within five months) uses a 12-month multiplier; a periodic payment proposal (paid over six to 24 months) uses a 24-month multiplier.⁷

Equity in Assets

The IRS also counts what your assets are worth after subtracting secured debts, but it doesn’t use full market value. It typically applies a quick sale discount of 80 percent, then subtracts encumbrances. A house worth $300,000 with a $220,000 mortgage becomes $240,000 at quick sale value, minus the mortgage, leaving $20,000 in net realizable equity.⁸

Bank accounts, investment accounts, and retirement funds get counted too. Equity in assets essential to earning your income generally won’t be added to RCP if you run a viable business, because forcing a sale of your income-producing equipment would kill the income stream the IRS is counting on. Tools of the trade for sole proprietors carry a statutory exemption from levy. Real property used in a business follows a comparison rule: the IRS uses whichever is higher, the equity value or the projected future income the property generates.⁸

Total RCP equals net realizable asset equity plus the future income component. If RCP is less than your tax debt, the IRS has a mathematical reason to consider settling for less. If RCP meets or exceeds the debt, you’re expected to pay in full, either right away or through a payment plan. The IRS generally won’t accept an Offer in Compromise for less than your calculated RCP.⁶

What Your Number Buys You

The same financial analysis feeds several outcomes, and the standards get applied with different degrees of flexibility depending on which path you’re on.

Installment Agreement Under the Six-Year Rule

If disposable income is positive but not enough to clear the debt quickly, the IRS can set up a monthly payment plan. For taxpayers who don’t qualify for a streamlined agreement, the six-year rule offers real breathing room. Under it, the IRS can allow all reasonable expenses, including conditional ones like student loan payments and credit card minimums, as long as your total liability with projected penalties and interest gets paid within six years and before the collection statute expires. You still submit financial information, but you don’t have to substantiate every line item.⁹

The six-year rule applies only to individuals. Corporations, partnerships, LLCs where the entity is the liable taxpayer, and business-related liabilities of sole proprietors don’t qualify.⁹

Partial-Pay Installment Agreement

When full payment isn’t possible before the collection statute expires, the IRS can grant a partial-pay installment agreement. You make monthly payments based on your ability to pay, but the total collected won’t cover the whole debt. These require a full Form 433-A and a thorough look at asset equity, and the IRS expects you to use available equity to make a payment where appropriate before granting one.¹⁰

Currently Not Collectible Status

If your allowable expenses meet or exceed your income, disposable income is zero or negative. The IRS can then classify your account as Currently Not Collectible and stop active collection. The debt doesn’t disappear. Interest and penalties keep running, and the IRS reviews your finances periodically. But no levies, no garnishments, and no seizures while the status holds.¹¹

Offer in Compromise

An OIC settles the debt for less than the full balance. Because the IRS won’t accept less than your calculated RCP, the standards effectively set your minimum offer. The offer package uses Form 433-A (OIC), which is structured to feed directly into that calculation, along with Form 656, a $205 application fee, and an initial payment. Low-income certification exempts you from both the fee and the initial payment.⁷

The Ten-Year Clock Changes the Math

Every ability-to-pay calculation runs against a deadline. Under IRC 6502, the IRS generally has ten years from the date a liability is assessed to collect it. That deadline is the Collection Statute Expiration Date, or CSED. When it runs, the IRS can no longer collect the remaining balance.¹²

The remaining time on the clock changes RCP. The IRS projects future income only through what’s left of the collection period, so a shorter remaining period means a lower RCP. That can be the difference between qualifying for an Offer in Compromise and getting pushed into a full-pay installment agreement. Certain actions pause the clock: filing an Offer in Compromise, requesting a Collection Due Process hearing, or filing for bankruptcy all extend it, so the actual expiration date may shift.¹³

If You Disagree With the Result

If the IRS applies the standards and reaches a number you disagree with, the appeal path depends on what the agency did.

For disputes over an installment agreement, including a rejection based on your financial statement, file Form 9423, Collection Appeal Request, with the same office or Revenue Officer that made the decision within 30 calendar days. A managerial conference isn’t required, but the IRS strongly recommends one before escalating.¹⁴

For lien, levy, or seizure actions, the timeline is much tighter. Request a conference with the employee’s manager first. If you still disagree, you have two business days to notify the collection office and then three business days to submit Form 9423 before collection can resume.¹⁴

When you receive a Notice of Federal Tax Lien Filing (Letter 3172) or a Final Notice of Intent to Levy (Letter L-1058 or LT-11), you have 30 days to request a Collection Due Process hearing by filing Form 12153. This is more formal than a Collection Appeals Program conference. To propose a collection alternative during the hearing, you’ll need a completed Form 433-A and supporting documents.¹⁵

Missing the 30-day CDP deadline doesn’t leave you empty-handed, but it costs you. A late request results in an “equivalent hearing” with no right to judicial review if you disagree with the outcome. That 30-day window is one of the most commonly missed deadlines in tax collection, and the consequence is far bigger than the effort of filing on time.

1
Internal Revenue Service. National Standards: Food, Clothing and Other Items
2
Internal Revenue Service. National Standards: Out-of-Pocket Health Care
3
Internal Revenue Service. Collection Financial Standards
4
Internal Revenue Service. Local Standards: Transportation
5
Internal Revenue Service. Internal Revenue Manual 5.15.1 – Financial Analysis Handbook
6
Internal Revenue Service. Topic no. 204, Offers in Compromise
7
Internal Revenue Service. Form 656-B, Offer in Compromise Booklet
8
Internal Revenue Service. Internal Revenue Manual 5.8.5 – Financial Analysis
9
Internal Revenue Service. Internal Revenue Manual 5.14.1 – Securing Installment Agreements
10
Internal Revenue Service. Internal Revenue Manual 5.14.2 – Partial Payment Installment Agreements and the Collection Statute Expiration Date
11
Internal Revenue Service. Internal Revenue Manual 5.16.1 – Currently Not Collectible
12
Internal Revenue Service. Time IRS Can Collect Tax
13
Internal Revenue Service. Internal Revenue Manual 5.1.19 – Collection Statute Expiration
14
Internal Revenue Service. Collection Appeal Request (Form 9423)
15
Internal Revenue Service. Collection Due Process (CDP) FAQs