Hans Kasper, MS-CPA, PS

Offers In Compromise and Bankruptcy
 

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Bankruptcy and Past Due Taxes

First, let me say that our office does not prepare offer in compromise forms due to the fact that the offer process with the IRS is very time consuming, emotionally draining, and generally a fruitless process.  However, if you are already a client of ours, we will review the paperwork that you have completed and offer suggestions for improvement.

See this link for changes in the OIC IRS procedure as of 08/29/03.  There is now a fee of $150.00.

The Tax Reconciliation Act of 2006 increases the amounts that must be paid by taxpayers submitting an offer-in-compromise. Under the new law, taxpayers are required to make partial payments of their liability in addition to any user fee now imposed by the IRS; however, the user fee will be applied to the outstanding tax liability. For a lump sum offer, taxpayers will pay 20 percent of the amount offered. For an installment payment offer, taxpayers will make their proposed scheduled payments while the IRS considers the offer. If the IRS fails to process the offer within two years, the offer will be deemed to be accepted.

Impact. The two-year deadline may provide a significant benefit to taxpayers waiting for the IRS to process their offer.


Offers in compromise are well-publicized, but hard to get.  The purpose of an offer in compromise is threefold:

  1. To allow the taxpayer to settle with the IRS on past due taxes in an amount that the IRS is willing to receive and the taxpayer is able to pay.  Able to pay includes borrowing the money from relatives or others.  The payment may also be a given amount per month over a period of time.  Usually, this monthly amount is more than the taxpayer can afford.

  2. To bring the taxpayer to an understanding that they need to file bankruptcy.

  3. To bring the IRS to a point of understanding that any amount is uncollectible and the taxpayer needs to be placed in an "Uncollectible" status.  Once ten years have passed from the original filing date of the tax returns, then by law, the debt is forgiven.

Generally, the only people who qualify for an offer are:

  1. Those with a low or no current income and, due to medical issues, a very low or no future potential of income;

  2. Those who can borrow from a relative the offer amount that the IRS has established; and

  3. Those who have no equity in any assets or do not own any assets.

The steps taken and the forms that need to be filed with the IRS are:

  1. Call the collections office on the most recent collections notice that you have received.  Ask them to stop the collections process and tell them that you are going to prepare an offer in compromise.

  2. Complete Form 656 Offer in Compromise.

  3. Complete Form 433A Collection Information Statement For Individuals.

  4. In addition, if you own a business, Complete Form 433B Collection Information Statement For Businesses.

If you are not exact on these forms, then you will only be hurting yourself.  Be prepared!  They are going to go through your finances with a fine toothed comb.

Also, go on the Web and research offers in compromise.  However, a WARNING is needed here.  There are many organizations that promise success but only take your money.


Bankruptcy and Past Due Taxes

If you want to get rid of your past due taxes that the IRS has placed on an "Uncollectible" status by filing bankruptcy (Chapter 7), then you must do the following:

  1. Click here to read a good article about bankruptcy and taxes.

  2. Go to a bankruptcy attorney, mention to him that you have past due taxes that you want to file bankruptcy on, bring with you the tax assessment transcripts that you have obtained from the IRS for the year on which you owe taxes, and have him qualify you for bankruptcy.

I have seen numerous cases where people have filed bankruptcy and still owe IRS taxes.  The reasons for this are:

  1. The taxpayer didn't tell the attorney about the past due taxes.

  2. The attorney didn't inquire about past due taxes.

  3. The attorney didn't know that past due taxes could be relieved in bankruptcy and didn't coach the client on how to achieve this.

Chapter 13 bankruptcy, the wage earners plan, can also be used to diminish or eliminate the taxes owing.  Please contact a bankruptcy attorney about this opportunity.  The three year waiting period may not apply to Chapter 13.

To locate a bankruptcy attorney, look in the phone book or purchase a copy of The Daily Journal Of Commerce which lists all of the bankruptcies filed in Western Washington along with the bankruptcy attorney's name and phone number.

Click here to view the IRS publication 908 regarding bankruptcy and tax law.

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This page was last updated on 05/13/2010

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