Client as Onion: Peeling Down To The Core

Bankruptcy Client as OnionWhen we finally got there, the client’s reluctance to wait 8 weeks to file bankruptcy was predicated on the (unreasonable) expectation that the IRS would forgive tax debt in an offer in compromise.

I got involved counseling a new bankruptcy attorney whose clients wanted to file Chapter 7 right now, while one spouse was unemployed.  A job offer was on the horizon, they thought, and their eligibility for Chapter 7,  they assumed, was problematic with both employed.

Yet they had $6K in taxes that would become dischargeable in 8 weeks and another $12K in taxes that became dischargeable in 8 months.  They were dead set against filing Chapter 13 and professed not to be able to take the collection calls for even 8 weeks.

As I probed for the basis of what I saw as poor decision making on the clients’ part, I asked what the clients’ plan was to deal with the $18K in income tax liability that would survive an immediate bankruptcy filing.  That seemed like a very high price to pay to stay out of Chapter 13.

Oh, I was told, the clients expected to settle with the IRS for less via an offer in compromise.

So, there was the “aha” moment:  the clients who feared that two incomes would drive them into a Chapter 13 plan they didn’t want assumed that the IRS would look at that same income and mark down their tax liability!  All I can say is that the ads for tax fixers who will get you a deal with the IRS must be pretty persuasive.

Let’s look at the basic facts about offers in compromise.  The IRS compromises tax debt when there is doubt about either liability or collectability.  That is, if there is doubt that you really owe the tax, they may settle.  Or, if there is doubt that they can really collect all that you owe, they may settle.

Factors in the doubtful collectability analysis include the number of years remaining before the statute of limitations on collection of the tax runs and the age, health and income of the taxpayer.  In the situation I’m describing, none of those factors cut in the debtor’s favor.

An astute bankruptcy lawyer keeps peeling the onion til she gets down to the underlying client assumptions and helps the client weigh the truth and applicability of those assumptions.  Often you will find that they are based on misinformation or wishful thinking.

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  • And, the pending offer in compromise tolls (stops the clock) for the time periods that must be satisfied to discharge the tax in bankruptcy.