IRS Debt Blog

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By Michael S. Anderson of Anderson Tax Law logo for Arizona tax attorney Michael S. Anderson P.C.
  • Is bankruptcy the only way to eliminate tax debt?


    Bankruptcy can be a powerful tool in dealing with serious tax debt.  It can wipe away certain types of tax debt based on income, employment, transaction privilege, penalty and interest and we use it to help clients get rid of millions in tax debt.

    BUT…it isn’t the only way to get rid of tax debt and in my experience other options should be reviewed first before bankruptcy.

    The IRS rules offer two other primary debt reduction methods that are preferable to bankruptcy if they make sense.

    The first is the “IRS Offer in Compromise“.

    If you offer to settle the debt for less than what is owed and that amount you offer is based on what you can reasonable afford over time, the IRS may accept the Offer and they do about 35% to 40% of the time.

    What constitutes a “reasonable offer” is actually a bit complex.  It is based on a formula and information about your past and future finances.

    But…if your situation makes you a good candidate, the offer in compromise should be considered before jumping into bankruptcy.

    The second is the “Partial Payment Installment Agreement”.

    This type of agreement allows you to use the IRS statute of limitations on collection to your advantage IF you can prove to the IRS that the monthly amount required to pay the debt in full with penalty and interest before the IRS statute of limitations is over, is too high to leave you reasonable living expense budget.

    So for example if you owe the IRS $50,000.00 and the Collection Statute has 5 years left on it you would need roughly $834.00 per month to pay the debt in full and on time.

    If you can convince the IRS that $834.00 per month is too high to leave you a reasonable amount to live, the IRS will reduce the monthly payment.

    If the monthly payment doesn’t pay all the debt before the Statute runs out, the remainder is wiped away.

    Three downsides exist:

    1.              Depending on the debt amount, the IRS will record a Notice of Federal Tax Lien while in the payment plan and damage your credit score.

    2.              The IRS will review the partial payment plan every two years to see if you can afford more.

    3.              The reasonable budget is based primarily on the amount the IRS thinks you should be living on,  not the amount you actually are living on.  This can reduce your living standard substantially.



    Despite the downsides associated with both the IRS Offer in Compromise and the IRS Partial Payment Plan, both have to be considered and compared to bankruptcy before you try to use bankruptcy to reduce the debt.