Being in debt is not pleasant…and tax debt is no different. While filing for bankruptcy may help you with most debts, it is not always the best solution for dealing with IRS debts. One of the most popular ways for dealing with IRS debts is by settling tax debts through the Offer in Compromise Program.
Key Insights We Will Cover:
– What is an Offer in Compromise?
– When an OIC is better than filing for bankruptcy for dealing with tax debt
– When Bankruptcy may actually be your best option
What is an Offer in Compromise?
An Offer in Compromise (OIC) is a way to pay off your tax debt for less (usually MUCH less) than you owe. It is, however, a bit more complicated than simply throwing out a number to the IRS and hoping they will accept it out of the goodness of their hearts. A lot goes into an Offer in Compromise and much of your financial life is considered when coming up with an offer amount. When an Offer is accepted, however, it can be a great way to pay off your debt and get a fresh start with the IRS.
Although there are three different types of Offers in Compromise, most Offers are known as Doubt as to Collectibility Offers in Compromise. Basically, if you can convince the IRS that you are not reasonably likely to be able to pay off your debts before the expire, then they will settle for less than you owe.
The minimum amount the IRS will accept as a settlement is a formula based entirely on the taxpayer’s ability to pay. The formula does not have anything to do with how much the taxpayer owes. In fact, on multiple occasions, I have been able to settle IRS debts greater than $100,000 for one-time payments of less than $1,000.
When an OIC is Better Than Filing For Bankruptcy (for dealing with tax debt)
Although filing for bankruptcy is the most common solution for dealing with debts you cannot afford to pay back, it does have its drawbacks – especially when it comes to the impact it will have on your ability to borrow after the bankruptcy is over. Not to mention the hit your credit score will take when you file bankruptcy. That’s why it’s usually a good idea to look at alternative ways to deal with your tax debt, and only use bankruptcy as a last resort. There are many situations were an Offer in Compromise is the best option for dealing with tax debts you cannot afford to pay.
For example, if the IRS is the only significant creditor you are dealing with, you will probably be better off going for an Offer than by filing bankruptcy. Because of the way the minimum offer amounts are computed, you can usually get at least as good a deal through an Offer in Compromise as you can by filing bankruptcy. A person with no assets and little income can use an Offer in Compromise to eliminate their tax debt without paying hardly anything to the IRS – just like that person would be able to do by filing a Chapter 7 bankruptcy.
Also, there are many circumstances in which IRS tax debts do not qualify to be discharged in bankruptcy. There are certain timing provisions your tax debts must meet before they would qualify for a bankruptcy discharge. There are quite complex rules that deal with the amount of time you would have to wait before being able too discharge your tax debt in bankruptcy. It would require a detailed review of your IRS transcripts before anyone would be able to tell you if your taxes qualify for a bankruptcy. Furthermore, there are other requirements that must be met to qualify for bankruptcy that have nothing to do with timing. And there are some types of taxes that you can never discharge in bankruptcy, no matter what the circumstances are. (For more information about discharging tax debts in bankruptcy, check out our blog). The point is, in many cases, bankruptcy is not even an option for dealing with IRS debts.
When Bankruptcy May Actually Be Your Best Option
When I meet with a client for the first time, one of my questions for them is “If I waved my magic wand and made your tax debt disappear, would you be able to keep up with your other debts?” Generally speaking, if the answer is “yes” then I know an Offer in Compromise may be their best option.
If they say “no,” then I may lean more toward suggesting that they file for bankruptcy. Because filing an Offer does not do anything to deal with other creditors, sometimes it’s best to go through the bankruptcy process. That’s the only way to deal with all your creditors at one time.
It is worth mentioning that the process for hearing back from the IRS about your Offer in Compromise can take longer than a year. Also, people who are in an open bankruptcy proceeding can not do an Offer in Compromise. So, if you were to submit an Offer in Compromise to resolve your IRS debts, and then file for bankruptcy while the offer was pending, your offer would get sent back. For that reason, people who cannot deal with their other creditors, even if the IRS debt did not exist, should consider filing for bankruptcy first, and then doing an Offer in Compromise afterwards.
Contact an Experienced Tax Attorney
Whether you are looking to file an Offer in Compromise, or think that bankruptcy may be your best option, you need the right team in your corner. Look no further than the skilled, seasoned attorneys at Ayar Law. At Ayar Law, we focus exclusively on tax issues and we know the ins and outs of tax laws and tax debt resolution. Give us a call today and get free, no-obligation advice! 800.571.7175
– An Offer in Compromise (OIC) is when a taxpayer settles their tax debt for less than they owe.
– There are certain circumstances where an OIC is your best option for dealing with tax debt (as opposed to filing bankruptcy)
– For example: If the IRS is your only significant creditor that you owe money to.
– Bankruptcy should only be considered as a last resort
– There are many circumstances in which IRS tax debts do not qualify to be discharged in bankruptcy
– There are other factors to consider that may make bankruptcy your best option
– For example, if dealing with just your tax issue would not alleviate all of your financial woes. That’s a time to consider bankruptcy
– For more information about how to handle your tax debt, contact the attorneys at Ayar Law. We offer free, no-obligation tax advice. 800.571.7175