Offers in Compromise, Installment Agreements and Bankruptcy Considerations
Because delinquent taxes are a debt owed to the Government, the United States may bring any type of civil action available to other creditors. In addition, the IRC gives the IRS the power to collect delinquent taxes by administrative levy, and it also provides special rules for civil suits involving tax liens. The existence of a valid tax lien is a prerequisite to all of the enforced collection methods.
As a general proposition, the IRS does not take into account the taxpayer’s ability to pay a tax debt when determining the extent of the taxpayer’s liability. But, the IRS typically does consider to ability to pay during settlement negotiations with the taxpayer. Despite that, even if the taxpayer or tax advisor is successful in negotiating a settlement totaling only a fraction of the originally asserted deficiency, this may be a hollow victory if the taxpayer cannot come up with the funds to pay the settled amount. Because the IRS’s enforced-collection procedures can seriously disrupt the taxpayer’s business and employment relationships and jeopardize the taxpayer’s credit rating, it is important for the taxpayer and his or her representative to attempt to negotiate the method of payment before IRS files a Notice of Federal Tax Lien. This part of the negotiations can be just as important as settling the underlying tax liability.
Having said that, all too often, however, an attorney may be called in to assist the taxpayer in a tax debt collection matter at the “last minute”, after IRS has already filed a Notice of Federal Tax Lien. Even at this late date, the tax attorney should: (1) confirm that the underlying liability has been properly assessed and (2) determine whether the statute of limitations on tax debt collection remains open. Both of these matters can be established from IRS’s copy of the taxpayer’s transcript of account. Identifying the assessment date is important not only for the purpose of confirming whether the statute of limitations on collection has expired, but also because, the date of assessment fixes the date on which the federal tax lien arose. This latter determination may also be important should priority conflict arise. Tax Attorney should also determine whether the period to request a Collection Due Process (CDP) hearing remains open.
Once the IRS threatens the collection proceedings the tax attorney should consider tax relief options such as offers in compromise, installment agreements and tax relief in bankruptcy.
IRS INSTALLMENT AGREMENTS COMPARED TO OFFERS IN COMPROMISE
As a general matter, an installment agreement allows the taxpayer to pay an assessed liability over time, while an offer in compromise may permit the taxpayer to pay less than the total amount of the assessed deficiency.
PARTIAL PAY INSTALLMENT AGREEMENTS (PPIA)
Another viable tool for tax resolution can be PPIA, which in most general terms can be explained as a tax relief measure that lies somewhere in between the regular installment agreement and offer in compromise. For more detail visit https://www.irs.gov/irm/part5/irm_05-014-002r
DISCHARGE OF TAXES IN BANKRUPTCY
Another alternative that may be available to a taxpayer facing the threat of enforced IRS collection proceedings is to file a petition for bankruptcy. The Bankruptcy Code, 11 USC, provides that certain tax liabilities are dischargeable in bankruptcy. Once the debtor’s tax liabilities are discharged in bankruptcy, the IRS is enjoined from seeking to collect any further amounts not recovered through the bankruptcy proceedings. If the taxes are not dischargeable, the IRS can seek to collect the amounts as part of the bankruptcy proceedings or wait until the automatic stay is lifted and then collect the amounts directly from the taxpayer.
As a general rule, all the tax claims except priority taxes are dischargeable in bankruptcy. Thus, income taxes may be discharged if they were: (1) due more than three years before the bankruptcy petition is filed and (2) assessed more than 240 days before such date.
- In addition to priority taxes, tax underpayments attributable to fraudulent returns or willful tax evasion, regardless of when the fraud or evasion occurred, and claims relating to taxes for which a required return or evasion occurred, and claims relating to taxes for which a required return was not filed or was filed late (but within two years before the bankruptcy petition date) are not dischargeable.
For a taxpayer whose total tax liabilities substantially exceed the taxpayer’s assets and whose tax liability is presently dischargeable, a bankruptcy petition may present a viable option. However, because a bankruptcy action implicates important non-tax considerations, the taxpayer should consider this alternative carefully before deciding that it is best. Faced with the possibility of seeking an offer in compromise or filing a bankruptcy petition, for instance, the taxpayer must weigh the discharged tax liabilities against the negative effect of bankruptcy filing may have on his or her credit rating, at a minimum.
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