1st Step - Get Compliant in Filing All Your Taxes
The IRS will not accept an Offer in Compromise if you are not compliant in filing all your tax returns. If you don't know whether you are compliant or not, then contact the IRS and make sure you verify what years are not filed and get those taxes done. If you own a business this would include all payroll taxes. You also need to be making sure all estimate tax payments are being made
2nd Step 2- Fill out Form 433-A (OIC) to see what your disposable income and net equity in Assets are
Form 433-A (OIC) is required by all individuals who want to file an Offer in Compromise. The Form 433-A (OIC) goes over your assets to see if there is any value to the assets that could be obtained, i.e. by selling or liquidating the item. The Form 433-A (OIC) also sees whether you have transferred assets for not fair market value, i.e. to get out of your name. The Form 433-A (OIC) goes over other rights to money or assets you may have that could go to IRS. Lastly, and just as important, the Form 433-A (OIC) has you enter your income vs. allowable expenses to see what available disposable income ("left over income") you would have to give to IRS each month.
3rd Step - Review the Form 433-A and see what assets with equity you have and what your allowable disposable income is.
If you have assets or if you have transferred assets in last 10 years without getting paid or if you have rights to assets then you have to calculate the total value of these assets then subtract the loans against them to get your net equity in assets. After you have calculated your net equity in assets or rights to assets then take your household income (your's and wife's most likely) and subtract the allowable expenses, i.e. rent, utilities, car payment, insurances, taxes paid, out of pocket medical, food, clothing: See the collection financial standards here: http://www.irs.gov/Individuals/Collection-Financial-Standards for what the IRS would allow based on your family size. Just because you pay $3,000 a month for food, if you can't prove that it is necessary and ordinary for your health and welfare the IRS will only the standards, which can be dramatically less.
Step 4 - Calculate your Lump Sum Offer Amount
Take the sum of your allowable monthly disposable net income (gross monthly income - allowable household expenses) x 24 months Plus your net equity in assets will = Your Offer Amount. If this amount is more than what you owe then an Offer in Compromise might not be the best option.
Seek Help/Advice From a Tax Attorney
While the above is the general knowledge, other specific rules and more detailed regulations can apply. It is very important to get a legal opinion from a qualified tax attorney to get the best results possible.