Many people in America have debt problems. A lot of those people will, at one point or another, either consider or file for bankruptcy. Unlike the television commercials would have you believe, bankruptcy is not the solution to all a client’s money problems, especially, if it involves income taxes.

The Benefits of Bankruptcy

First we will look at the advantages of your client contemplating a bankruptcy filing that includes federal income taxes. If the client is eligible, a bankruptcy may be an alternative to several payment options the IRS may favor. These include:

1. Installment Agreements – While in an installment agreement the client continues to accrue penalties and interest. A bankruptcy filing either halts or can entirely eliminate the accrual of these additional costs. The IRS also charges a fee to set up an Installment agreement, which can not be applied to a bankruptcy. Lastly, the amount of the payment, if any, to the IRS is determined by the bankruptcy court and not at the whim of the IRS collections section.

2. Offer in Compromise – With the backlog of Offer in Compromise requests it can take up to a year or longer to accept or decline, another year to appeal and then the client will normally have a 24 month payment plan implemented. The client also has to agree to stay currently filed and paid on their income taxes for 60 months afterward. The acceptance rate on an Offer in Compromise is currently about 30% or less but the I.R.M. Sec. 5.8.5.5 gives Revenue Officers leeway in accepting an offer if threat of a bankruptcy is on the horizon.

3. Penalty Abatement – The Form 843 or Penalty Abatement Request is one of the more subjective programs at the IRS. The agent will review the request and determine “on the merits” if the penalties should be abated. With a bankruptcy, penalties either become a low priority or are eliminated all together.

Other advantages to filing a bankruptcy including income taxes include things like:

1. The release of levy or seizures. We covered this in our Liens and levies course earlier.

2. Solve unreasonableness issues with a Revenue Officer. If you have run into a Revenue Officer that you simply can not work with or Automated Collection Services (ACS) is giving you the run around, filing a bankruptcy can put a stop to that. Since the tax law is subordinate to bankruptcy laws, the filing can eliminate personality issues and drawn out IRS procedures. Revenue Officers and ACS do not handle bankruptcy cases and the case file will be transferred to the appropriate unit.

3. The “Cramdown of Liabilities”, which we will discuss in detail later in the course, will allow a much lower rate of recovery then an IRS agreement.

4. The ability to resolve all of the client’s debts at the same time (IRS, state taxes, credits cards, etc) as opposed to having to deal with the various creditors individually.

5. Allows the client to get compliant with the IRS but does not put the onus on them of having their debts reinstated if they do not remain compliant in the future. Gives them a true fresh start.

Next up, Timing rules!

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