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 |