Help! Undermount drawer slide issue

Not quit understanding your explanation. Pictures may help.

Sounds like your cabinet has a face frame?

If so,
The drawer guide needs to be flush with the edge of the face frame,
so yes, you would have to space the guide out from the inside wall.

You indicate that your cabinet has a face frame, in this application I think the drawer slide is mounted to the face frame (just a little back from the front face of the face frame) and at the rear via a rear mount bracket that comes with the slides and allows you to mount the back of the slide to the back of the cabinet. You could also mount a spacer block to the side of the cabinet and mount the drawer slide to that spacer block.

Is it possible that you have the rear mounting point for the drawer slide skewed inside the cabinet-so that the slide is not mounted in line with the drawer opening (or parallel to the sides of the cabinet)?

I am pretty confident that the rear mounting is correct - I think I am going to try a spacer block and hopefully that should work. Another idea I had was was to drill a hole on the bottom of the drawer slide tab that sits on the face frame. From there I could screw it down to the bottom of the face frame (since it will be off the side)

^Edan ^ is pushing Teds Plans. Don't click on his link.

I'm not sure I am following what you are describing either, but it almost sounds like you bought the wrong length slide. The front of the slide needs to mount inside the face frame just shy of the front edge. The rear of the slide can either be mounted to a bracket that mounts to the back, or to a block on the side that is sized to make the slides parallel. If the slide is not extending past the drawer when mounted to the face frame, then the slide is too short.

Blum has some great info on sizing drawers for their slides so go to their website and search for the slide model you purchased and you should be able to find some good install info. It should tell you all of the info you need to size your drawers properly, and how to mount the slides.