Bankruptcy versus Offer in Compromise, A Comparison
|What is Different?||Bankruptcy||OIC|
|Who runs the process||A court process where IRS is just one of many creditors.||An administrative process controlled by the IRS.|
|Which tax debts are dischargeable||Tax debts are generally only dischargeable if: (1)income taxes which meet the 3yr/2yr/240 day rule or (2) they are tax penalties which are less than 3 yr old when the case is filed.
Pre-filing interest follows the tax; if the taxes are dischargeable then so is the associated interest
Sales taxes, excise taxes and employee payroll tax withholdings are nondischargeable.
|All tax debts, except criminal restitution, can be compromised or settled
Federal excise taxes and employee payroll tax withholdings can be compromised, which cannot happen in bankruptcy.
|What happens to any tax liens||Generally, tax liens pass through bankruptcy unaffected and remain until paid, the collection statute runs out, or are paid off.||Liens are removed once the offer in compromise is approved and all payments under the offer are made.|
|The restrictions placed on what expenses you can claim against your income to calculate taxpayer’s ability to pay||When determining how much a debtor can pay towards his tax debts, the debtor is allowed to consider all expenses reasonably necessary to support them and their dependents||IRS can restrict the taxpayer’s expenses (for purposes of figuring out ability to pay) to those amounts to the IRS national and local financial standard amounts. Much less generous than actual under bankruptcy.|
|How long the taxpayer can stretch out payments to the IRS||It is possible to stretch payments out over 60 months in a Chapter 13 (but not a Chapter 7)||Offer has to be paid in no more than 5 payments for a cash offer or 24 months for a periodic payment offer. There is a much shorter payment window on offers than a Chapter 13.|
|The ability of the IRS to collect discharged or settled tax debts from the taxpayer post-bankruptcy or post accepted offer in compromise||The IRS can only collect any previously discharged taxes by seizing and selling the taxpayer’s property which was subject to a notice of federal tax lien at the time the bankruptcy case was filed.
Additionally, the IRS can only collect the value of the property at the time of filing bankruptcy and no post-filing appreciation.
|The IRS can collect the whole tax debt (including any interest and penalties that accrued) only if the taxpayer violates the terms of the offer in compromise.
Normally, this happens when the taxpayer does not file and pay his or her taxes on any future tax returns for the next five years after the offer is accepted.
Once a default happens, the IRS tax debts come back into existence and the IRS can collect from the taxpayer themselves or by seizing his or her property.
I am Maine’s IRS Problem Solver. My firm helps Maine taxpayers in trouble. If you or someone you know in Southern Maine wants more information on how to resolve your IRS tax problems, please feel free to contact me directly at 207-502-7181 or by filing out my contact form. A Maine tax attorney can help you consider your options.
James D. Wade, Esq.
Law Office of James D. Wade
57 Portland Road, Unit 3
Kennebunk, ME 04043