Taxpayers experiencing tax debt problems seldom compare the IRS offer in compromise with the Chapter 13 bankruptcy. Frequently, the Chapter 13 will provide a more certain remedy for the taxpayer to resolve tax debt. This article examines the relative benefits of both the offer in compromise and Chapter 13.
An offer in compromise may be the most advertised tax remedy. You can not listen to radio or watch TV without being bombarded by ads to settle your tax debt. Often the ads proclaim that the IRS has announced that leniency in the collection of the tax debt exists for a limited time. The sad truth is that the leniency announcement by the IRS was often for other problem area, such as tax shelters. The IRS rejects approximately 85 percent of all offers in compromise filed because of doubt as to collectibility. Offers in compromise are usually filed because the taxpayer believes the tax debt can not be paid, Doubt as to Collectibility is the most common type of offer in compromise. Other types of offers in compromise are outside the scope of this article.
The benefit of the offer in compromise is that the tax liabilities, including the related penalties and interest, are reduced to the amount the IRS and the taxpayer agree can be paid. Both parties must agree to the terms of the offer in compromise. The offer in compromise is a contract between the IRS and the taxpayer. The terms of the contract can be enforced against the taxpayer as well as the IRS.
Acceptance of the offer in compromise occurs when the IRS believes that the offer is at least as much as could be collected by the IRS over the 10 year life of the statute of limitations. The IRS will reject an offer that is for a lesser amount than it could otherwise collect.
The IRS uses a uniform set of financial standards that are not flexible in both the analysis of the amount paid monthly in an installment agreement and in an offer in compromise. These standards limit the expenses for living that the taxpayer can claim are necessary for living. The standards include food, housing and utilities, transportation, and out of pocket health expense. The standards may cause drastic problems for a taxpayer with a moderately higher standard of living. Business expenses are not affected by the standards.
The analysis of the minimum offer in compromise that will make the offer processable is the equity in the taxpayer's assets plus the amount that could be paid in an installment agreement over a specified period of time. The duration of the future monthly payments considered by the IRS depends upon how the offer will be paid by the taxpayer. The IRS wants 48 months of monthly payment if the taxpayer offers a lump sum. The IRS wants 60 months of monthly payment if the offer is to be paid in a short term agreement of two years or less. However, the IRS will consider factual issues such as retirement and health of the taxpayer in shortening the duration of the multiplier.
The short duration of the deferred payment results in the squish factor. The taxpayer is required to use the standards proposed by the IRS. The collection standards are designed to allow the taxpayer to pay as much as possible. Therefore, the squish factor is paying 60 months of payments in twenty four months. Taxpayers need other peoples' money. This might be a loan or gift.
The equity in assets includes the assets that are not available to be collected by other creditors. Those assets include retirement accounts. Often the taxpayer believes that the funds offered can be the funds saved up for this purpose. The funds saved up by the taxpayer for the purpose of paying an offer in compromise are part of the computation of the minimum offer.
Sometimes, the IRS will allow the offer to be a set payment over the remaining statute of limitations for collection if a taxpayer can not pay in a lump sum or a short term payment agreement.
The taxpayer must begin the nonrefundable payment of the offer in compromise before acceptance of the offer. The funds are applied to the debt owed. The funds are applied to the oldest debt first.
The benefit of the offer in compromise is that both the IRS and the taxpayer have an enforceable contract for the payment of the offer in compromise. The downside is that the minimum offer considered is often more than the taxpayer can possibly pay. The acceptance of the offer of the taxpayer is conditioned upon being required to stay compliant in both filing tax returns and paying current tax for five years after acceptance of the offer in compromise.
Consider the Chapter 13 bankruptcy. A Chapter 13 is a reorganization of debts of the debtor. Immediately an important difference is apparent. The Chapter 13 goal is to allow a fresh start from all of a debtor's dischargeable debt if successfully completed. The fresh start includes the tax owed at the time of filing the Chapter 13. The offer in compromise is only focused on the tax debt. Other debt is not considered. The calculation of the minimum offer in compromise may require the debtor to default on other obligations. Chapter 13 is a broad remedy. Offers in compromise are very narrow remedies.
Reorganization allows the debtor to pay his creditors based upon a Plan of Reorganization approved by the bankruptcy court. The plan specifies how each class of creditors is to be paid. The IRS is just one of the creditors. The jurisdiction of the U.S. Bankruptcy Court includes the IRS. The IRS is subject to the same rules as other creditors in Chapter 13.
The duration of the Chapter 13 can be as long as 60 months. Often IRS penalties and interest on the penalties are only paid at a fraction of the total. Old taxes may also often be paid at a fraction of the amount owed. Future interest is often not required to be paid on both the older tax and the newer tax. Credit cards, medical debt, signature loans, and other unsecured debts are paid the same fraction as the above debts.
Debts that are subject to a security agreement and that are in default may be cured. Debts that would not be discharged under the U.S. Bankruptcy Code can be paid over the life of the Chapter 13.
Chapter 13 uses a means test that uses the IRS collection as part of the calculation of the amount to be paid to the unsecured creditors. The means test is supposed to increase the pool paid to the unsecured creditors.
One of the major advantages of Chapter 13 over an Offer In Compromise is the means test allows payments on secured debt to reduce the amount the unsecured creditors receive. The calculation of the minimum acceptable offer in compromise is independent of payments to secured creditors.
The Chapter 13 has drawbacks. These disadvantages for the debtor include requiring permission to incur debt and sell assets. The debtor is required to stay current of future financial obligations. The amount of debt that is allowed in Chapter 13 is limited and therefore, chapter 13 may not be available to all debtors. Available credit in the future is often affected. The credit report will reflect the bankruptcy.
Probably the most dramatic reason for the filing of the bankruptcy is the automatic stay. This is an order of the court that requires the status quo is maintained. Creditors can not continue collection efforts and the debtor can not borrow or sell property. The automatic stay lasts until the court lifts the stay. This occurs when the debtor does not fulfill his duties to a creditor or fails to carry out the plan of reorganization.
The submission of an offer in compromise extends the duration of one of the required tests that determine if taxes are able to be discharged as an unsecured debt. The premature filing of an offer in compromise may cause tax debt to be classified as a nondischargeable debt. That is a debt that must be paid over the life of the bankruptcy.
The filing of a bankruptcy also has effects on tax debt. The statute of limitations for collection of tax is extended. The amount of interest and penalty required to be paid on tax debt and old unsecured tax debt may be reduced. Additionally, payment of other unsecured debt may be limited. This makes payment of the nondischargeable priority, or newer tax debt easier because more funds are available to be applied to that debt. The payments in the bankruptcy are first applied to the tax debt secured by liens on the property of the debtor and to newer tax that would otherwise not be discharged.
The decision to choose the filing of Chapter 13 or an Offer in Compromise should be examined very carefully. Each option has advantages that may result in a lower payment for that particular person's tax debt. Each has advantages. Each has disadvantages.
Selection of the taxpayers' adviser is important. The adviser or representative must have the ability to analyze both an Offer in Compromise and Chapter 13. The adviser needs to be able to assess the needs of the taxpayer and recommend the best choice. Obviously many tax advisers are inadequately trained as their experience is limited to the IRS administrative remedies. These administrative remedies include offers in compromise and installment agreements. Professionals such as certified public accountants and enrolled agents may not have experience with the details of the benefits of bankruptcy and therefore, have a narrow focus. A bankruptcy attorney may have some familiarity with offers in compromise and installment agreements. The best choice is to seek a professional recommendation and carefully research the qualifications of the professional. A tax attorney that is also a bankruptcy attorney is often the best choice to represent you.
©Copyright William F. Kunofsky 12/29/2009 all rights reserved.
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