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