Sunday, November 20, 2011

Tax Debt Relief: Offer in Compromise

      The Bankruptcy Code specifically states that tax debts are nondischargeable in a Bankruptcy. Therefore, filing a Chapter 7 bankruptcy will not help you with your taxes. The only way to get rid of your tax debt in a Bankruptcy is through a Chapter 13 plan. I do not know the policy of the IRS attorneys throughout the rest of the country, however, here in the Middle District of Tennessee, the IRS attorneys will object to the confirmation of a Debtor's plan unless the IRS claim is paid in full. Other unsecured creditors have no choice. If the debtor wants to pay 100% or 0% to the other unsecured creditors, they are forced to accept pennies on the dollar. The IRS, instead of accepting a percentage of the claim and going after the deficiency post-bankruptcy, will object and the case will be dismissed.

       There is, however, one way to reduce your tax debt. That is through an Offer in Compromise.  An Offer in Compromise is basically a debt negotiation with the IRS, where the taxpayer offers the IRS a settlement. There are 3 options: 1) a lump sum payment; 2) a reduced balance to be paid off in 5 months or less; or 3) a reduced balance to be paid off in over 5 months. When completing an Offer in Compromise you must also submit a budget and explanation of your circumstances.

       Additionally, once an Offer in Compromise has been accepted by the IRS, the taxpayer can then file for Chapter 13 bankruptcy and incorporate the Offer in Compromise into their plan. So long as the debt treatment remains the same, the IRS will not object.

       Forms necessary to complete an Offer in Compromise: F656F433a (Individual); F433b (Business)

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