Bankruptcy Lawyer Bryan W. Stone answers the question: “What are the pros and cons of bankruptcy?”
An interesting article recently published by Forbes magazine sent out a necessary reminder to its readers: your tax bill probably isn’t going anywhere, even if you file for bankruptcy.
Bankruptcy declaration is a powerful tool for many individuals and companies whose debt-to-asset ratio is out of control. It allows a party to discharge, or eliminate, certain debts and reorganize or liquidate their assets so that some of their other creditors can be paid a portion of what they are owed. However, most types of taxes owed to the IRS are not usually one of these dischargeable debts. Certain taxes can be discharged in bankruptcy under very specific circumstances, but most back taxes do not fit this exception and qualifying tax debt under it can be an extremely complicated process.
As a solution to this dilemma, the article focused on the three different types of what are called Offers in Compromise, or OICs. Section 7122 of the Federal Bankruptcy Code allows taxpayers the ability to negotiate with the IRS to settle their debt for an amount less than what is owed. It is important to note that there is no legal right to have a tax bill that is valid reduced by the IRS; rather, it is entirely up to the agency’s discretion.
Doubt as to liability
The first type of Offer in Compromise occurs when there is a legitimate doubt that you owe all or part of what the IRS says you do. This type of OIC cannot be used if the calculated tax debt is based on current law or has been established by a final court judgment. This type of OIC is generally less common and more difficult to pursue.
Doubt as to collectability
The next type of Offer in Compromise applies when a taxpayer’s assets and income are less than the full amount of their tax liability. It does not usually apply to taxpayers who can eventually pay their liabilities in full through an installment agreement or via other means. Individuals applying for this type of OIC must use specific forms collaborating their wages or business income with their OIC application.
Special circumstances/effective tax administration
This remaining type of offer in compromise appeals to the IRS to negotiate a tax bill based on the premises of hardship, public policy, and equity. It may only be used when a taxpayer does not qualify for either of the other two types of OIC. It asks the IRS to take a person’s exceptional circumstances into account where paying the full tax liability would cause them severe economic hardship, i.e. unable to pay for their basic and reasonable (but not luxury) living expenses. The IRS will consider the individual’s unique set circumstances in making this determination, including any history of noncompliance with tax laws.
An application for an Offer in Compromise is just that—an application. The IRS will review it and make a decision of whether or not to accept the applicant’s offered amount, sometimes resulting in back-and-forth negotiations between the IRS and taxpayer until an acceptable amount is agreed upon.
It is important to note that the IRS will require mass amounts of financial documentation once you have applied for an OIC, and that if your application is rejected, the disclosures you made usually give the IRS all the information it needs to speed up its collection efforts against you. Because of this, it makes sense not to make an offer unless it is likely to be accepted.
If you are contemplating bankruptcy in the Charlotte area, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with legally sound advice for your particular situation.
About the Author
Kyle Frost joined Arnold & Smith, PLLC in 2013 where he focuses his practice on all aspects of civil litigation and bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord-tenant issues.
Born and raised in upstate New York, Mr. Frost attended the University at Albany on a Presidential Scholarship, graduating magna cum laude with a double major in Political Science and Sociology. He went on to attended Wake Forest University School of Law in Winston Salem, North Carolina.
Following college, Mr. Frost spent over a year teaching English in South Korea. He worked in a private school in Seoul developing curriculum, English programs, and educating both children and adults that were interested in learning a new language.
In his spare time, Mr. Frost enjoys homebrewing, fishing, and travelling.
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