IRS Offer in Compromise vs. Bankruptcy
This is a great question and there is really a one sentence answer to it… that goes like this.
If your debt problem is primarily the result of tax debt, and if you qualify for an offer in compromise in every way, and if you can find the money to pay the settlement amount, an Offer in Compromise is a no brainer.
Lets break that down a bit more. One sentence is never enough for me.
First, let’s tackle the “primarily tax debt” issue.
There aren’t very many of us that have tax debt and tax debt alone. Many people with tax problems have other debt that would benefit from a good run through the Arizona Bankruptcy machine. It is often the case as well, that certain tax debt… especially income tax debt, can be made “dischargeable” in bankruptcy just like a credit card debt, and if it isn’t entirely dischargeable, it is often partially dischargeable with some planning.
As a result, whenever I review a case with some serious tax and other debt problems, I weigh the Offer in Compromise vs Bankruptcy. Sometimes, we do an Offer in Compromise first and a bankruptcy later. Sometimes, vice versa and sometimes, one and not the other. Rest assured, that wherever there is other consumer debt acting as a real burden to our client, bankruptcy is a topic of discussion, not just the Offer in Compromise.
Second, do you qualify for an Offer in Compromise in every way
Do you remember that old Clint Eastwood Movie, “Every Which Way But Loose”? I suppose the phrase “in every way” made me think of that movie, or maybe it could have been the tremendous impact the Orangutan had on my life.
Seriously, that movie was really about nothing. Clint Eastwood was a good fighter, wins an Orangutan in a card game? and gets jilted by a pretty woman who he chases around between fights and hi-jinx.
Why did I watch that?
Now…if you don’t qualify every which way for the Offer in Compromise, you will be thinking that it was really about nothing too.. and wondering why the CPA or EA let you do it in the first place.
That was a reach…wasn’t it?
Qualifying for an Offer in Compromise doesn’t just mean that you fill out some papers and show the IRS that you don’t have a lot of money left over at the end of the month. There is much more to it…and it ‘s called proving to the IRS that your reasonable collection potential is less than the tax debt and that you are filing the offer in what I call “good faith”.
Determining what the Reasonable Collection Potential (RCP) is, can be confusing because there is a formula that determines it.
Even if you meet this RCP formula, the IRS can reject the offer for all sorts of reasons. Based on your past history, it may decide that you have the ability to make more money that you are now, or it may just think you acted in bad faith in the past, and don’t deserve the settlement.
If the Offer doesn’t work out, you will have stopped the statute of limitations on collection from running, given the IRS a bunch of money you probably didn’t have, stopped certain time frames from running that are necessary to turn your income tax debt into a dischargeable debt in bankruptcy, wasted the fee you gave to someone to help you do it, and ended up right back where you started.
Which reminds me of a song…mmm..on to the last part of the question,
Finding the money
Doesn’t it always just come down to this. You work hard and have a little of it and everyone else wants it. Some people earn your dollar by providing a great product that you feel is worth the trade, some people just take the dollar, squander it on “do-gooder” projects that make the situation worse….
Don’t get me started.
Anyway…finding money, yes.
“Jack” owed the government a tidy sum with interest and penalty. He had taken a different job that paid less than he was accustomed to, and really had no way to pay it.
Perfect candidate for an Offer right?
But…the RCP made things a little rough for him. The IRS was going to say that he had the equivalent of 1000.00 per month leftover after he paid basic living expenses. He had few assets and so the Offer amount from a cash standpoint was going to be about 20,000.00. He needed $4000.00 upfront and than the remainder in 5 installments when the offer was accepted.
He didn’t have the $4000.00 and he couldn’t save it easily because the budget the IRS was going to use to calculate that $1000.00 ability to pay per month amount, wasn’t his real budget.
To repeat…the “formula” budget used to calculate the Offer amount wasn’t his real budget.
The IRS’ RCP formula disallows lots of stuff. Let’s just say that one of the things it would have disallowed as a budget item was something he couldn’t easily stop paying.
And….”Jack” had no rich Uncle.
He just couldn’t figure out how to come up with the money to pay the offer amount without causing other serious problems in his life.
So what did he do? Instead of taking the chance he simply decided to file a bankruptcy case.
His income tax debt met the date criteria for discharge, and because the tax debt was the majority of all his tax debt, he didn’t have to take the means test to qualify to file the bankruptcy case.
If an Offer in Compromise may be in your future, make sure that it is going to work in every which way before you file it.
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