Within the past few years, the IRS changed its rules for deciding what action to take in collecting a taxpayer's unpaid tax liability (in particular, whether to enter into an installment agreement or accept an offer in compromise). In working out a payout plan, the IRS has decided that taxpayers will be allowed so-called necessary expenses, may be allowed conditional expenses, and in its discretion may be allowed miscellaneous expenses. Necessary expenses provide for the health and welfare of the taxpayer and family and/or relate to the production of income (and so establish the minimum amount the taxpayer and family needs to live on). If reasonable in amount, necessary expenses will be allowed but are subject to both National and Local Standards. Conditional expenses are expenses that do not meet the necessary expense test but are allowable if the tax liability can be fully paid within three years.

National Standards have been set for five necessary expenses. Four of the standards (for food, housekeeping supplies, apparel, and personal care products and services) are set according to the Bureau of Labor Statistics Consumer Expenditure Survey, while the fifth standard (for miscellaneous expenses) is established by the IRS. Housing (including utilities) and transportation expenses are covered by locally set standards. While taxpayers are not required to substantiate the amount of expenses categorized as National Standards for their income level, they do have to substantiate expenses that exceed the amount allowed for that level. Conversely, they may be required to substantiate expenses categorized as Local Standards or Other Necessary Expenses.

The IRS has announced that these financial standards can now be found on the Internet at its World Wide Web site "The Digital Daily,", under "Tax Info for You." National Standards, as the name implies, apply nationwide except for Alaska and Hawaii, which have their own tables. Taxpayers are allowed the total National Standards amount for their family size and income level without the IRS questioning the amount actually spent. On the other hand, the Local Standards amounts vary by location (i.e., are broken down by state and county). Unlike the National Standards, the taxpayer is allowed the amount actually spent or the Local Standards amount, whichever is less. IRS Ann. 97-87, 1997-35 IRB.

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