Bankruptcy and Offers in Compromise

This one is for Lex and Gail and follows up on Peeling the Onion, about the client who was counting on the IRS compromising their  priority tax debt just as their income jumped.

First, get the lingo right:  it is an offer IN compromise, not an offer AND compromise.

In general, the IRS will not negotiate an offer while a debtor is in bankruptcy.  I have been successful once in 30 years in getting the IRS to compromise a priority tax claim where there was no doubt as to liability.  So, bankruptcy is not the setting in which to try to reduce taxes where the issue is ability to pay, rather than the amount of the liability.

The IRS’s attitude and interest in offers in compromises waxes and wanes. The terms more recently have become less appealing as a non refundable payment toward the offer is required.  The timeline for a decision is often protracted and the process often benefits from the involvement of a professional.  The amount the Service is willing to compromise is in part tied to the length of time remaining on the IRS collection statute.

For all of those reasons, Chapter 13 looks appealing if you are dealing with priority taxes, those not dischargeable in Chapter 7.  Chapter 13 can repay priority claims, over as long as five years, without interest or penalties. The non priority taxes are discharged at the conclusion of the case.

If the client can’t handle a 13 now, calculate how long they must wait for taxes to age and drop out of the priority category.

Remember, too, that the IRS is often willing to categorize a file or taxpayer as “currently uncollectable”.    In contrast to the OIC,  being labeled uncollectable doesn’t have the IRS giving up forever on collection.  But neither does it stop the running of the statute of limitations.

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  1. >If the client can’t handle a 13 now, calculate how long they must wait for taxes to age and drop out of the priority category.<

    Do you use the same timing rules for that as for determining whether back taxes are dischargeable in a 7?

  2. Cathy Moran says:

    Yes the rules are the same: a priority tax is not dischargeable in Chapter 13. See 1328. It can be paid through the plan, but not discharged.

    A tax that isn’t priority, see 507, is dischargeable.

    So you need to master the three year rule; the two year rule, and the 240 day rule to know when the tax slips into the dischargeable bin.