If you incur a tax debt and are unable to pay back what you owe in one lump sum, you may need to disclose your financial information to the IRS to prove how much you can afford to pay on a monthly basis. The same thing applies to the Offer in Compromise program. Under no circumstances will the IRS agree to a settlement of your tax debt without first reviewing your financials in detail. If you hire a tax attorney, he/she will present your financials in a light most favorable to you, the taxpayer, and will argue the finer points to help you get the best result possible.
What sort of financial information does the IRS request? In the most general sense, they want to know about your income, expenses, and assets. However, the questions often depend on the individual circumstances of each case: the amount owed, the type of resolution sought, the closeness of the Collection Statute Expiration Date, etc. Sometimes the questions can be quite invasive. But for some expenses, the IRS allows a set amount without questioning the actual amount spent by the taxpayer. These are referred to as the “National Standards.”
The National Standards include an allotment for each of the following expense categories:
- Housekeeping supplies
- Apparel & services
- Personal care products & services
The current National Standard amount for all 5 categories combined is $565 for a household of one. For purposes of determining how much you can pay under an Offer in Compromise or an Installment Agreement, the IRS will allow this full amount, even if you spend far less in reality. The IRS allows $1,029 for a household of 2; $1,227 for 3; $1,450 for 4, and another $281 for each additional person beyond 4. These are the new amounts based on updates done April 27, 2012 and effective retroactively from April 2, 2012.
The previous National Standard amount for a household of 1 was $534. The National Standard amounts are based on data from the Bureau of Labor Statistics and are typically updated no more than once a year.