Bankruptcy Options

Tax discharge under Chapter 7.
If your back taxes are more than three years old, you have filed your tax returns over two years ago, and the IRS has assessed those taxes more than 240 days ago, then the best option for you may be to file a Chapter 7 bankruptcy, if you otherwise qualify. In Chapter 7, all your tax debts meeting those requirements will be discharged.

Tax discharge under Chapter 13.
Chapter 13 bankruptcy provides broader relief. Under Chapter 13, generally you can discharge back taxes--even if they have not filed a tax return--so long as the tax is more than three years old and the tax has not been assessed.

If the tax has been assessed, the taxpayer has to wait 240 days from the date of assessment to file, in addition to meeting the three-year-old tax rule, to discharge the tax.

Also, a Chapter 13 bankruptcy will allow you to pay the tax and interest for priority tax years (less than three years old, and which must legally be paid) in monthly installments for up to five years interest-free, in addition to discharging penalties for all years. Finally, Chapter 13 also can provide a windfall by discharging an unsecured tax you provided to pay for in your plan if the government fails to formally file its claim by the deadline set by law.

The "Chapter 20" option.
An additional option would be to file a Chapter 7 bankruptcy and then immediately afterwards file a Chapter 13 bankruptcy if you owe both old taxes and priority taxes. By filing the Chapter 7 first, you will discharge your old taxes. Once the old taxes are discharged, you could then proceed with a Chapter 13 bankruptcy to pay off your priority taxes.

Note, the age of the tax debt is calculated based upon the date that tax year's liability was "due and payable," a date that will be extended if you were granted an extension, filed bankruptcy, submitted an offers in compromise, and other events. If you're not sure, consult a tax professional and order your records from the IRS.

Options Within the Tax Agency

Settling through an Offer in Compromise.
If, after calculating your Chapter 13 plan payments, you are unable to pay your nondischargeable tax debt within five years, then you may consider filing an Offer in Compromise with the IRS. Under an Offer in Compromise, the IRS has the discretion to reduce the amount of taxes you owe, but you need to make a highly convincing case that you don't have the financial means to pay the taxes now, or in the foreseeable future.

Other options.


Depending on the facts, the taxpayer may have other options, including a challenge to the tax itself based on legal grounds (such as disallowance of a deduction, inclusion of an item of income, etc.), within the tax agency, the US Tax Court, federal courts and the state courts. Also, depending on the facts, there may be available other applications for relief (such as innocent spouse relief, injured spouse relief, etc.)

• The notice of tax lien was never recorded, although the tax agency says it was.
• The notice was recorded after the automatic stay took effect.
• The notice was recorded in the wrong county. It must be recorded where you owned property.
• The notice was filed against assets that do not belong to you.
• The lien expired. The life of the lien is ten years, unless re-recorded.
• The lien was based on an invalid assessment.

• In bankruptcy, the taxpayer is protected by the "automatic stay" - a court order that goes into effect upon filing immediately barring all creditors, including the IRS or state tax authority, from enforcement actions such as seizures or garnishments of bank accounts or wages.
• The taxpayer has the benefit of an independent decision-maker in the federal bankruptcy judge instead of the tax agency itself acting as sole "judge, jury and executioner."
• Chapter 13 bankruptcy offers particular advantages:
  • Interest-free repayment: Interest is stopped and cannot accrue on nondischargeable taxes while the taxes are paid off in the Chapter 13 plan.
  • Realistic repayment terms: The Chapter 13 repayment plan is based on the debtor's actual expenses, not arbitrary standards for housing, living, and transportation expenses imposed in an Offer in Compromise which often are not realistic.
  • Flexibility: If the tax is still too large to pay off in a Chapter 13 plan from projected income, the taxpayer can dismiss the bankruptcy at any time and attempt an Offer in Compromise based on inability to pay.
  • Deal with tax liens: The taxpayer can ask the court to eliminate or reduce tax liens for older, dischargeable taxes to the value of the underlying collateral, thereby "freezing" the size of the tax, and then pay off that reduced amount in the Chapter 13 plan.
  • Quick and less expensive: Chapter 13 plans are confirmed within a few months, while an IRS decision on an Offer in Compromise often takes a year or more.

What is an Offer in Compromise?
An Offer in Compromise ("OIC") is a way for taxpayers to compromise their outstanding tax obligations without having to pay the full liability owed.

Do I qualify for an Offer in Compromise?
The Internal Revenue Service may legally compromise a tax liability for one or both of the following reasons:
1. Doubt as to Collectibility. This term means that there is some doubt as to whether the IRS can collect the tax bill from you either now or in the foreseeable future because of your financial situation. This is the ground most frequently used by taxpayers attempting an offer.
2. Doubt as to Liability. This term means that there is some doubt as to whether you legally or factually owe the tax bill.

How do you determine monthly income?
The IRS uses a table of standard maximum housing, living, and transportation expenses that will be allowed. You take your monthly after-tax income minus your expenses, or the standard, whichever is less, and come up with your monthly disposable income. (Follow the link above to the tables and compare to your own actual expenses. In almost all cases, the IRS maximum allowable expense will be much lower.)

Sometimes additional expenses will be allowed, such as court-ordered payments or extraordinary medical expenses, depending on IRS discretion.

How much should I offer?
An offer is calculated by taking the net realizable value of your assets plus the amount of money the IRS can take from your future income.

The net realizable value is the value of your assets if the IRS seized your property and sold them today. To determine the value of your assets if they were sold today, the IRS takes the quick sale value, which is generally considered 20% less than the fair market value.

In determining your future income for purposes of an offer, you subtract your monthly living expenses (subject to the IRS allowed maximum) from your total monthly income to determine your disposable income. You then take that figure for monthly disposable income and multiply it by a number that is related to the type of payment plan you propose.

The most common type of payment proposed in an OIC is the cash offer, which is paid to the IRS in one cash payment within 90 days of the acceptance of your offer. To calculate your future income with the cash offer, you take your disposable income and multiply it by 48.

Example:
Mary owes the IRS $52,000 due to her failure to pay her federal income taxes. Mary has $1,500 in cash, and a house, which has a fair market value of $150,000 and a quick sale value of $125,000 (80%). She owes $115,000 on her first mortgage. Mary makes $3,000 a month after tax and her living expenses total $2,700 (based on IRS tables for allowable expenses).

What is a tax lien?
A tax lien allows the IRS to secure its debt against your personal property or real estate as collateral. If the IRS holds rights in your home, re-financing or selling will be complicated. The IRS can eventually act on the lien to sell property and pay off the tax debt.

What is a tax levy?
A tax levy allows the IRS to seize property to satisfy a tax debt, including ordering your bank to pay over the funds in your account, or ordering you employer to garnish your wages and send them to the IRS.

What is a Notice of Levy or a Notice of Lien?
Before the IRS can place a levy or lien on your property they are required to give you notice. Thus, if you receive such a notice the IRS is about to place a lien or levy on your property for outstanding tax debts. Once you receive this notice, you should take action as soon as possible.

How much can the IRS take from my paycheck?
Generally, the law prevents creditors from taking more than 25% of your pay check, however, the IRS is exempt from this rule. Thus, generally they can take as much as they want.

What is an installment agreement and will it help?
Under an installment agreement, the IRS agrees to take repayment of the tax debt over time, with interest. Under law the IRS is required to agree to installment payments for tax debts of $10,000 and less, if you are current on all other taxes, and can repay in 36 months or less. For larger tax debts, the agreement is discretionary with the IRS and may require a disclosure of the debtor's financial information as justification. If you miss a payment, enforcement action will begin again. The installment agreement does nothing to erase of reduce the tax debt. Furthermore, in the long run you will pay more to satisfy the original debt.

I got an IRS notice they were going to start collections on me, but they stopped after I called and told them I was not working. Is the tax gone?
No. The IRS collector probably placed your account into temporarily uncollectible status. The tax debt has not been forgiven and continues to grow with interest and penalties. Collection will resume once the IRS sees wages reported under your social security number from your new employer.