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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