How it works
The IRS publishes national standards for food, clothing, and other items, and local standards for housing, utilities, and transportation. Some categories are allowed at the standard regardless of actual spending; others at the lesser of actual or standard. Health insurance and out-of-pocket medical costs are generally allowed as paid. Private school tuition, credit card minimums, and high car payments are typically disallowed.
Why it matters
Disposable income for an installment agreement or an Offer in Compromise is income minus these allowances, not minus what you actually spend, which is where most taxpayers find the proposed payment unaffordable.
Example
A taxpayer pays 2,800 dollars in rent in a county where the housing standard is 2,200 dollars. The IRS allows 2,200 unless she documents why the higher amount is necessary, so 600 dollars a month is treated as available to pay the debt.
Related: reasonable collection potential, installment agreement.
