IRS Tax resolution vs Bankruptcy?  Which one is better.

irs tax resolutionThis is a common question.  Should I hire a tax attorney to resolve my IRS tax debts, or should I find a bankruptcy attorney to file for bankruptcy?  It is best to talk to both to get their opinions and do some research on your own.

Bankruptcy can be a great way to discharge your consumer debts, but may not be the best solution for discharging IRS tax debt.  This is because certain tax debts cannot be discharged in bankruptcy and the timing of the filing must also be taken into account.

There are certain things to consider when looking into bankruptcy versus tax resolution.  First thing first, call the IRS and get account transcripts for all years owing.  By checking these, it will tell you all you need to know as to what type of tax debt you have, how much and when your returns were filed among other things.

It is very important to know the origin of your tax debt.  There are certain types of tax debt and scenarios that are ineligible for bankruptcy:

  • Payroll taxes. You may not discharge payroll taxes in bankruptcy. Period.
  • Fraud. If you received a penalty for filing a fraudulent return for a certain period, such tax period is not eligible for bankruptcy. Bankruptcy is also not available for criminal fraud. Bankruptcy is also barred if you engaged in “willful evasion” of paying your taxes.

There are also certain types of scenarios that show ineligibility for bankruptcy:

  • Prior bankruptcies. If you filed Chapter 13 bankruptcy in the last two years, you are not eligible. If you filed a Chapter 7 bankruptcy in the last eight years, you are likewise not eligible for a new bankruptcy filing. Please see additional bankruptcy rules with regard to Chapter 7 and Chapter 13 bankruptcy filings.
  • 240-day rule. The bankruptcy must be filed more than 240 days after the tax was assessed.
  • Three-year rule. The bankruptcy must be filed more than three years after the tax return was due to be filed, including extensions. In other words, the liability on the most recent three tax years cannot be discharged.
  • Two-year rule. The bankruptcy must be filed more than two years after the tax return was actually filed. Thus, non-filers are not eligible for bankruptcy. Also, if the IRS files a return for you, called a Substitute for Return (SFR), you may not discharge tax debt for those tax years. This is true even if you then file an original return after the IRS files a substitute return.

Just a side note on tax liens.  If you have an IRS recorded tax lien attached to your property, they will not be released with a bankruptcy.  They will continue to remain until the collection statute expires.  This statute begins from the time of assessment of your tax debt until 10 years, but can be extended by various tolling events, i.e., offer in compromise, CDP hearing, pending installment agreement, bankruptcy, etc.). Thus, it is a bad idea to do a bankruptcy if you need a tax lien release quicker than that.

So, what types of tax resolution options are available when bankruptcy is not a viable option? There are three main ways to resolve a tax debt case with the IRS:

  1. Offer in Compromise (“OIC”). Settling your tax debt for less than you owe. Here are some OIC basics and advantages over a bankruptcy:
  • you can file for any tax period after tax debt is assessed
  • you may file whether a substitute for return was done or not
  • there is no time limitation
  • all IRS collection activities must stop while offer is being evaluated (which can be between nine and twelve months).
  • tax liens are released 30 days after OIC terms are met (basically when full settlement payment is made).
  1. Installment Agreement. If you are able to pay the tax debt in full before the collection statute expires, the IRS will allow you to establish a payment plan.

If you owe less than $50,000 and you are able to pay the tax debt within 72 months or less, a Streamlined Installment Agreement is an option.  The bonus with this plan is that no financials are required.  If your liability exceeds $50,000, you can also establish a payment plan to be paid in full over 84 months (this is an experimental program with the IRS).  Again, no financials are required.

Alternatively, if you cannot pay off the tax debt in 72 months or 84 months and need a lower monthly payment, a Collection Information Statements (IRS Form 433F) is required to show that you can only pay a certain amount. This is called a Partial Pay Installment Agreement.  Additionally, if you owe more than $100,000 and want a payment plan, a 433F financial statement is required.

To read more about installment agreement options, see https://deliataxattorneys.com/streamlined-installment-agreements-irs-tax-attorney/

  1. Currently Not Collectible Status (CNC). When you have no assets, no equity in assets you hold nor disposable income (where IRS allowable expense exceed income), getting into a CNC status with the IRS is a good option. You can request this status by filling out a 433F Collection Information Statement and submitting it to them by mail or over the phone.

Getting into this status basically means you are experiencing financial hardship and need collection activity to stop indefinitely or temporarily.  The downside is that the tax debt remains, accruing penalties and interest.  One of the main advantages with this status is that if you can run out the collection statute of 10 years, your tax debt will be discharged.

It is important to note, that the IRS will review your status searching for any change in income or financial circumstance.  If they see a change, they will request another 433F.  If they see that you have the ability to pay, they will take you out of that status and collections will begin again.

All in all, tax resolution is a great alternative to when bankruptcy is not an option.

The San Diego Tax Attorneys at Delia Law have many years of tax resolution experience and will competently represent you before the IRS.  Please call for a no-cost tax attorney consultation at (619) 639-3336. We look forward to helping you.

This blog post is not intended as legal advice and should be considered general information only.

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