Bankruptcy vs. Offer In Compromise

By: Robert T. Leonard, J.D., C.P.A.

Issue

Offer

Chapter 7

Chapter 13

Assets

Retain assets. Pay 20% quick sale discount on hard assets; 100% of value of cash assets. Special rules for IRA's

Assets in excess of state exemptions confiscated by trustee. Tax liens survive bankruptcy against pre-petition exempt assets

Retain assets: Must pay at least the value of non-exempt assets; must pay the value equity in property on which there is a tax lien. 3 to 5 years to pay

Payment options

Payable in 3 ways:

1. Within 90 days

2. Within 2 years

3. Over the remaining statute

Paid from bankrupts assets: Priority taxes survive bankruptcy

Trustee determines ability to pay. Must pay at least the value of non-exempt assets and must pay the value equity in property on which there is a tax lien. 3 to 5 years to pay

Substitute for returns

May compromise

Nondischargeable

Dischargeable

Late filed returns

May compromise

Dischargeable if filed at least 2 years prior to bankruptcy, 240 days after assessment & it is at least 3 years since the due date of the return

Dischargeable if 240 days after assessment & it is at least 3 years since the due date of the return

Non-filed returns

May not compromise until filed

Nondischargeable

Dischargeable if it is at least 3 years since the due date of the return

Fraudulent returns

May compromise

Nondischargeable

Dischargeable

Trust fund taxes

May compromise

Nondischargeable

Dischargeable only if the IRS files a late claim and the judge finds that the bankruptcy acted in bad faith

Hardship

IRS may consider

Trustee sometimes considers informally

Trustee sometimes considers informally

Impact of state exemptions

None

Trustee may only take nonexempt property. IRS may pursue pre-petition lien claims and nondischargeable taxes post bankruptcy

Impacts the amount due on dischargeable taxes which are not lien claims; i.e., bankrupts in liberal exemption states like Texas & Florida pay less

Enforced collection

IRS may not levy or seize while offer is under consideration

§ 362 prevents enforcement by IRS & other creditors

§ 362 prevents enforcement by IRS & other creditors

Other debts of taxpayer

Not settled

Discharges unsecured non-priority debts

Discharges unsecured non-priority debts

State tax obligations

Not settled

Same rules of discharge as for federal taxes applies

Same rules of discharge as for federal taxes applies

Penalties

Included in the offer

Discharged in unsecured and over 3 years old

Discharged in unsecured and over 3 years old

Impact of prior bankruptcies

Offer may be considered anytime after conclusion of a bankruptcy for nondischargeable taxes & secured taxes

May not file if received a Chapter 7 discharge within past 6 years

May file immediately after conclusion of a Chapter 7

Dollar amount of liability limitations

None

None

< $250,000 unsecured debt

Ideal client

Client with large nondischargeable tax obligations with modest earnings and few assets

Client with high income, few assets and large dischargeable tax obligations

Client with steady income who owes fraudulent income tax obligations