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Taxes Owed to the IRS: Offers in Compromise vs. Bankruptcy

We see many people in our office who owe back taxes to the IRS. If you ignore the IRS, they will levy your wages or bank accounts, leaving you with no money. There are several options you have to deal with this situation.

1. Installment agreement- You can enter into an installment agreement with IRS to pay off the tax. Interest will still accrue so this may take a very long time, but at least you will know that there will be no levies as long as you are current on your payments. This is the least attractive option. Our office can help you in obtaining an installment agreement.

2. Offer in Compromise- This is what all the ads you see on television or hear on the radio are referring to when they talk about the “New IRS Programs” or “The Fresh Start Initiative”. The Offer and Compromise (“OIC”) is not a new program and has been around since the 1990s. An OIC allows you to pay a smaller lump sum in full satisfaction of the tax debt. It is all formula driven: you must pay to the IRS as much as they would get if they sold basically all of your property and you pay them your monthly disposable income multiplied by 12. Disposable income means your monthly gross income less certain stingy expenses the IRS allows you. The key here is to manipulate the formula so IRS has no choice except to accept the OIC, something IRS seems to try and avoid. When doing an OIC it is important that you choose a reputable local attorney or accountant who has OIC experience. Most of the companies advertising on the radio or internet are out of state and I have never had a client give me a positive comment about them. They tend to take a large retainer from you after making big promises without ever reviewing your case, and then are unable to deliver. When you meet face to face with a local attorney, he can tell you what your chances for success are right then. Sometimes the numbers just do not work for an OIC.


3. A chapter 7 bankruptcy can discharge tax debt if it is for a tax year over 3 years old, it is over 2 years since the return was filed (you must have filed a return) and it is over 240 days since the tax was assessed. This is often a good way to go because you are dealing with a judge rather than a low level IRS employee.

4. If the tax is not old enough for a chapter 7 discharge, or it is 941 civil penalty tax, which can never be discharged in a bankruptcy, a chapter 13 bankruptcy is available. In this bankruptcy you pay off the tax in full over 5 years with equal monthly payments, but without interest.

The important thing to remember here is that just because you owe the IRS, you are not helpless and at their mercy. All of the above options can help you with your IRS debt.