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 |
