Comparing Bankruptcy With an IRS Offer in Compromise

Frequently, we meet with potential clients who have significant tax debt in addition to credit card, vehicle loan or mortgage debt.  In some cases, the tax problem is the factor that led a person to call our office.  In those cases where tax problems are the driving force behind the consultation, we have to consider whether the client is better off filing bankruptcy or pursuing a negotiated settlement with the IRS.

The IRS has a number of programs available to indivduals who have incurred significant tax liabilities.  Two of the most common programs are the "installment agreement" program in which the taxpayer pays 100% of his delinquent tax over several years, and the "offer in compromise" program in which the taxpayer settles his account for less than 100 cents on the dollar.

Interestingly, Congress looked to these IRS programs when designing the means test elements of the BAPCPA changes to the bankruptcy laws.  The budget expense categories used in means test calculations are derived in part from the approved expense categories that the IRS uses in both installment agreements and in offers in compromise.

Depsite what you may have heard, tax debt can be dealt with in a bankruptcy.  Chapter 7 can discharge "stale" tax debt and Chapter 13 can be used to pay recent tax debt (called priority debt), secured tax debt (when a tax lien has been filed) and unsecured (stale) tax debt.

Some commentators argue that bankruptcy may be a better tool for dealing with tax debts than installment agreements or offers in compromise.  Certainly the likelihood of obtaining a discharge is better than the odds of getting an offer in compromise accepted.  In addition, bankruptcy allows you to deal with all of your debts - not just tax debts while under the protection of the bankruptcy court.

Clark and Washington can advise you how your tax debt would be treated in either a Chapter 7 or Chapter 13 bankruptcy.  You can then compare the bankruptcy solution to the offer in compromise and/or installment agreement option and choose the remedy that offers the best benefits to you.