When Tax Resolution Is Better Than Bankruptcy

When Tax Resolution Is Better Than Bankruptcy

Bankruptcy is a very powerful tool in discharging consumer debts. When it comes to tax liabilities, however, it may not be the best case scenario. Why? Because not all tax debts can be discharged in bankruptcy, even if a taxpayer qualifies for Chapter 7.

Here is a list of all factors to consider when trying to discharge tax liabilities:

Offer in Compromise. Contrary to common belief, the acceptance rate on an Offer in Compromise (OIC) is not that low, statistically it is in the mid-30s. Of course, not all taxpayers qualify for this option, not unlike Chapter 7, but those who do can settle their tax debt for pennies on the dollar. The best advantage over bankruptcy is that you can file an OIC for any tax period as long as the tax is assessed, even if it’s assessed based on SFRs. There is no time limitation. Tax liens are released within 30 days after Offer in Compromise terms are met, i.e. when the taxpayer pays the offered amount in full. Collection activities stop when you file an OIC, so no more bank levies or wage garnishments. The offer amount is calculated based on the reasonable collection potential of the taxpayer plus any available equity in the assets owned. Offers can be paid in 2 different ways: 1. A Lump Sum Cash offer is paid within 5 months after acceptance, and 20% down payment is required upon submission; and 2. A Periodic Payment offer is paid within 24 months. Installment payments must start with the submission of the offer, but do not have to be equal. In other words, you can pay minimal amounts for 23 months and make the remaining balloon payment on the 24th month. Offer review takes between 4-18 months, depending on the amount owed and the existence of a ‘self-employed’ business. But the most attractive advantage of OIC over bankruptcy is the professional fee you charge, which ranges between $3,500 and $20,000.

Installment Agreement. When a taxpayer has disposable income to pay tax debt in full until the CSED (Collection Statute Expiration Date), you can establish a payment plan either online, through the Practitioner Priority Service over the phone, or by mail. When the liability is less than $50,000 and the tax debt can be fully paid in 72 months or less, a Streamlined Installment Agreement is also an option, no financials are required and it’s fairly easy to establish. When the liability exceeds $50,000 you can go for a Full-Pay Installment Agreement over the remaining statute (until CSED). Collection information statements are required in this case. If the remaining monthly income is not sufficient to pay off the tax liability until the collection statute expires, you may then establish a Partial Pay Installment Agreement.

Currently Not Collectible Status. When the taxpayer has no equity in assets and no disposable income, the government can put a hold on the taxpayer’s account and stop all collection activities. This option is similar to a Chapter 7 bankruptcy, but without the credit reporting disadvantages. The statute with CNC (Currently Not Collectible) cases does not stop running, which means that at some point the tax debt can simply expire. However, the IRS will conduct ongoing reviews of the account, and if the taxpayer’s financial situation improves, the CNC status is lifted and the collection machine starts rolling again, adding back penalties and interest accrued over time. Tax resolution is a great alternative when the bankruptcy route is closed. The case outcome definitely depends on the proficiency of the IRS representative. However, powered with invaluable tax resolution tools, bankruptcy attorneys can make the best of both worlds. PitBullTax Transcripts, available in October 2016, automatically analyzes your clients IRS transcripts, calculates the earliest bankruptcy dischargeability dates and CSEDs, as well as provides auto-generated reports based on transcripts data. You can analyze unlimited tax years for a flat fee. PitBullTax Software, the leading IRS Tax Resolution software, makes you a “go to” tax resolution expert, while streamlining your cases. Go to www.pitbulltax.com for a free trial.