WHEN TAX RESOLUTION IS BETTER
THAN BANKRUPTCY
By Irina N Bobrova, MST, EA, CAA, NTPI Fellow
COO with PitBullTax Software
·
B
ankruptcy is a very powerful
tool in discharging consumer
debts. When it comes to
tax liabilities, however, it may not
be the best case scenario. Why?
Because not all tax debts can be
discharged in bankruptcy, even if
a taxpayer qualifies for Chapter 7.
Here is a list of all factors to consider
when trying to discharge tax liabilities:
· Three Year Rule. The bankruptcy
must be filed more than three
years after the tax return
was due to be filed, including
extensions. That means that the
liability on the most recent 3 tax
years cannot be discharged.
· Two Year Rule. The bankruptcy
must be filed more than two years
after the tax return was actually
filed. This rule automatically closes
the bankruptcy door for non-filers.
More so, if the IRS files Substitute
for Return (SFR) on behalf of the
taxpayer, it precludes a discharge
for those tax periods, even if the
taxpayer files the original returns
after SFRs (see Hindenlang, 164
F.3d 1029). In McCoy, 666 F.3d
at 930, the Fifth Court of Appeals
decided that the “applicable
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CONSUMER BANKRUPTCY JOURNAL
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filing requirements” verbiage in
the hanging paragraph of IRC
§523(a) enacted in BAPCPA of
2005 precludes a bankruptcy
discharge of tax liabilities on
late-filed returns, even 1-day
late. The McCoy case dealt with
state taxes though, and other
courts have followed a different
approach in interpreting what
constitutes a return, concentrating
more on the substance of a return
rather than the time of filing.
240-Day Rule. The bankruptcy
must be filed more than 240 days
after the tax was assessed. This
rule is usually important when a
taxpayer is audited and additional
tax liability is assessed, especially
when a larger chunk of tax is
assessed after audit, than was
reported on the original tax return.
Fraud. If a penalty for filing a
fraudulent return was levied,
such tax period is not eligible for
bankruptcy. Criminal fraud also
negates the bankruptcy route.
Tax Liens. Liens will survive
bankruptcy until the collection
statute expires (10 years from
assessment date, but usually
extended by various tolling events,
i.e. bankruptcy, offer in compromise,
CDP hearing, pending installment
agreement, etc.). If your client
cannot wait for their lien release
until the CSED (Collection Statute
Expiration
Date),
bankruptcy
is not the best alternative.
Prior bankruptcies. If a taxpayer
filed Chapter 7 bankruptcy in the
last eight years, they are not eligible
for a new bankruptcy filing. For
Chapter 13 bankruptcy the time limit
is two years. There are additional
rules when jumping from Chapter
7 to Chapter 13 and vice versa.
Fall 2016
So what happens when some of the
factors described above come into
play, where bankruptcy is not a viable
option? The answer is simple – Tax
Resolution! There are three main
avenues for resolving a tax debt case:
1.
Offer
in
Compromise,
2.
Installment
Agreement,
and
3.
Currently Not Collectible Status.
Let’s discuss briefly each alternative.
Offer in Compromise. Contrary to
common belief, the acceptance rate
on an Offer in Compromise (OIC)
is not that low, statistically it is in the
mid-30s. Of course, not all taxpayers
qualify for this option, not unlike
Chapter 7, but those who do can settle
their tax debt for pennies on the dollar.
The best advantage over bankruptcy
is that you can file an OIC for any tax
period as long as the tax is assessed,
even if it’s assessed based on SFRs.
There is no time limitation. Tax liens
are released within 30 days after Offer
in Compromise terms are met, i.e.
when the taxpayer pays the offered
amount in full. Collection activities
stop when you file an OIC, so no more
bank levies or wage garnishments.
The offer amount is calculated based
on the reasonable collection potential of
the taxpayer plus any available equity
in the assets owned. Offers can be paid
in 2 different ways: 1. A Lump Sum
Cash offer is paid within 5 months after
acceptance, and 20% down payment
is required upon submission; and 2. A
Periodic Payment offer is paid within
24 months. Installment payments must
start with the submission of the offer,
but do not have to be equal. In other
words, you can pay minimal amounts
for 23 months and make the remaining
balloon payment on the 24th month.
Offer review takes between 4-18
months, depending on the amount owed
National Association of Consumer Bankruptcy Attorneys