Why accurate computations matter

When you appeal a collection action or prepare an Offer in Compromise (OIC), the agency assessing your case will compare your income to your allowable living expenses to determine what you can reasonably pay. The Internal Revenue Service uses the Collection Financial Standards (national standards, local standards, and vehicle/public transportation allowances) to decide what it will accept as “reasonable”. Properly computing and documenting these expenses protects your ability to meet basic needs while negotiating repayment, stopping garnishments, or achieving an OIC (IRS Collection Financial Standards page) (IRS).

Source references and authoritative guidance are essential: see the IRS Collection Financial Standards (IRS), Offer in Compromise guidance (IRS Offer in Compromise page), and consumer protections from the Consumer Financial Protection Bureau (CFPB) for debt-collection practices (CFPB).

Step-by-step: How to compute reasonable living expenses

  1. Gather your income and documentation
  • Collect recent pay stubs, bank statements, Social Security or benefit notices, and any sporadic income records. Use a consistent period (typically monthly) for all entries.
  • If self-employed, prepare a profit-and-loss summary for the same period and supporting bank statements.
  1. Identify applicable IRS standards
  • National Standards cover food, housekeeping supplies, clothing, and personal care. These are fixed allowances by family size and are published by the IRS annually (see Collection Financial Standards).
  • Local Standards apply to housing and utilities and vary by county or metropolitan area. Use the IRS table for your county.
  • Vehicle operating costs and public transportation allowances are also specified in the standards.
  • For Offers in Compromise and collection appeals, IRS examiners generally use these tables as baseline allowable expenses (IRS guidance on forms 433-A and 433-F).
  1. Add allowable actual expenses not covered by standards
  • Certain expenses are allowed as actual documented costs rather than using the national/local standard. Common examples include:
    • Health care premiums and documented out-of-pocket medical costs not covered by insurance.
    • Court-ordered payments (alimony, child support).
    • Childcare or special education expenses that are necessary and verifiable.
  • Keep receipts, invoices, insurance statements, and explanation of benefits (EOB) documents.
  1. Calculate total monthly allowable expenses
  • Start with the IRS standard amounts for your household size and county.
  • Replace any standard amounts with actual documented expenses only when the rules allow (e.g., medical costs).
  • Sum all categories to get your total allowable monthly living expenses.
  1. Determine monthly disposable income
  • Subtract total allowable monthly expenses from your monthly gross or net income, depending on the form used. The remainder is your monthly disposable income—the amount potentially available for collection.
  1. Translate disposable income to a collection metric
  • For Offers in Compromise, the IRS often multiplies monthly disposable income by a set number of months (commonly 12 or 24, depending on the case and whether the offer is based on future income or equity in assets) to estimate Reasonable Collection Potential (RCP). The resulting figure, plus realizable equity in assets, frames the IRS’s settlement threshold (see How Offer in Compromise Amounts Are Calculated).
  • For installment agreements and appeals, examiners use monthly disposable income to set payment terms or evaluate hardship.

Documentation checklist (what to submit in an appeal or OIC)

  • Completed financial statement (Form 433-A, Form 433-F, or Form 433-A(OIC) for offers). (IRS forms pages)
  • Recent pay stubs, benefit award letters, and bank statements (3–6 months).
  • Lease or mortgage statements, property tax and homeowner’s insurance bills.
  • Utility bills (electric, gas, water, sewer, trash), phone and internet bills.
  • Receipts and EOBs for medical and prescription expenses.
  • Childcare invoices, school or special needs documentation.
  • Car loan statements, registration, insurance and gas receipts if you claim vehicle costs.
  • Proof of court-ordered payments (divorce decrees, child support orders).

Give each item a one-line annotation in your submission noting dates, amounts, and how it connects to allowable categories.

Example (hypothetical) — walk-through

This simplified example is illustrative, not advice. Assume a single filer with $3,000 monthly net income and the following items:

  • IRS national/local standards total: $1,600 (food, housing/utilities, transportation standard)
  • Documented medical premiums/out-of-pocket: $250
  • Court-ordered child support payment: $300
    Total allowable expenses = $1,600 + $250 + $300 = $2,150
    Monthly disposable income = $3,000 – $2,150 = $850
    If the IRS uses a 12-month multiplier for RCP, the estimated collection potential would be $10,200 plus any realizable asset equity.

Document each entry and cite the IRS standard table you used. Examiners expect supporting invoices and contemporaneous bank statements; unexplained numbers are often rejected.

Practical tips and best practices

  • Use the right form and the most current standards. The IRS updates Collection Financial Standards; always cite the year/date of the table you used (IRS Collection Financial Standards).
  • Do not inflate or guess numbers. Conservative, well-documented figures are more persuasive than rough estimates.
  • Distinguish between discretionary and nondiscretionary expenses. Do not list nonessential services (streaming bundles, luxury subscriptions) as necessary living costs.
  • Emphasize forced or unavoidable payments: court obligations, essential medical care, and necessary childcare usually carry weight.
  • Regional cost-of-living matters. If you live in a high-cost county, the local housing/utility standard will reflect that; but you still must document actual higher costs if they exceed standards.

Common pitfalls and how to avoid them

  • Submitting incomplete bank records: avoid this by compiling continuous statements covering the same period as your claimed monthly averages.
  • Mixing gross and net figures: use the same income basis throughout your packet per the form instructions.
  • Omitting irregular but recurring costs: capture quarterly or annual expenses (like homeowners insurance) by converting them to monthly averages and documenting the annual bill.
  • Relying solely on verbal explanations: attach invoices, canceled checks, and receipts for everything you claim.

When standards don’t reflect your reality

If the IRS standard shortfall prevents you from covering essential needs (for example, unusually high medical expenses or an atypical dependent), you can provide a written explanation and documentary proof. Examiners have discretion to allow exceptions for verified extraordinary expenses, but these are decided case-by-case.

Links to related FinHelp resources

  • Preparing the financial package? Start with our guide: Preparing the Financial Package for an Offer in Compromise: Worksheets and Documents (FinHelp).
  • Want a step-by-step on valuation and multipliers: How Offer in Compromise Amounts Are Calculated: A Simple Walkthrough (FinHelp).

Professional and legal disclaimers

This article explains general methods and commonly accepted IRS practices as of 2025. It is educational and not a substitute for personalized legal or tax advice. For case-specific strategy, consult a licensed tax attorney, CPA, or an enrolled agent experienced in collection matters. For official IRS procedures and to download the latest Collection Financial Standards and forms, see the IRS Collection Financial Standards and Offer in Compromise pages (IRS).

Author notes and next steps

In my practice, a disciplined documentation package and conservative calculations materially improve negotiation outcomes. Assemble at least three months of documentary evidence, use the correct IRS standard tables for your county and household size, and prepare a one-page summary that ties each expense to a supporting document. If an OIC option appears viable after computing Reasonable Collection Potential, review the guides above on assembling a compelling offer and on how the IRS calculates offer values.

Authoritative links

If you want a checklist template or a sample one-page summary that you can adapt to your case, I can prepare that next (specify whether the case is an OIC, installment agreement, or administrative appeal).