There are three main types of offers in compromise that you can submit to the IRS.  The most common is the offer in compromise based on doubt as to collectability.  By filing this type of offer in compromise with the IRS you are telling them that you agree that you are liable for the taxes, interest and penalties that have accrued against you, but you can’t afford to pay them.  Since you cannot afford to pay the taxes in full you are requesting that the IRS take a reduced amount for this.  No doubt you have seen the late night television commercials stating that they can help you settle your taxes for “pennies on the dollar.”  They make it sound so easy.  So automatic.  My friends, it is not always that easy or automatic.  It all depends on your individual financial situation at the time you file your offer in compromise.

When I say your “financial situation” what I am talking about is your current income, your monthly expenses, and the equity that you have in the assets that you own.  Figuring out your income is usually the easy part.  If you are employed at a job, then you probably get a normal paycheck or at least a W2 at the end of the year that tells you what you made that year and you can average that out over the months.  I know that many of you are self-employed but that you do not keep good records and it is hard to determine what you actually earn.   In this situation it takes a lot more work to determine what to put in this line on the IRS forms.  But, you have to do this work – for a couple of reasons.  First, it is just good business for you to keep good records and stay on top of your company’s finances.  How else do you know how well your company is doing?  Second, the IRS is going to require you to prove to them what you say your income is.  They do not simply just take your word for it.

You will also need to include your spouse’s income in this calculation.  This is probably common sense if your spouse also owes the taxes with you, but a alarming question is often asked when the other spouse is not liable for the taxes.  Your spouse wants to know why they have to provide their income information.  Will they become liable for the taxes by doing so?  The short answer is no, they will not become liable for the tax by submitting their income information.  The IRS just requires the total household income in order to calculate what percentage of the household expenses to allow you to claim in the offer in compromise.  So, if you have the only income for the home, then you will be able to claim 100% of the expenses.  If, you and your spouse have equal incomes then you will only be able to claim 50% of the expenses and so on.

Now, where the IRS really gets you is on the expense side of the equation.  Most people do not live extravagant lifestyles.  They are simply trying to get by from one month to the next or maybe even one week to the next.  You have a mortgage or rent payment, the usual utilities like power, water, gas, cable and telephone, a car or two, some monthly prescriptions, and so on.  Here’s the catch: for many of the expenses you will list on your financial statement the IRS has “national standards” that they will allow as your monthly expenses.  These are called collection financial standards.  The problem with these national standards is that they are lower than what the average person spends on these monthly expenses and they do not changes very frequently so they will not take into consideration things like gasoline that costs $4 per gallon.  So if, for example, you have a family of three and your mortgage payment is $1,500 per month, the IRS may only allow $1,100 per month as the national standard for your area.  So right off the bat you are $400 in the hole.  Most Americans do not know about these national standards until it is too late when dealing with the IRS and they have already los...