The IRS can settle tax debts through an offer in compromise if they think the taxpayer can’t pay the full amount. This can happen if the taxpayer doesn’t have enough money and assets, or if there’s a question about whether the taxpayer actually owes the money. The IRS will look at the taxpayer’s financial situation and decide whether it’s better to accept less than what is owed. But if the IRS thinks the taxpayer can pay in full, they won’t accept the offer. Instead of going through this process, it’s usually better to file for bankruptcy to discharge the tax debt. A taxpayer’s reasonable collection potential is the total amount of money the government thinks they can realistically pay. This includes the value of their assets and their ability to make monthly payments. To figure this out, the taxpayer has to fill out a form and provide proof of their assets, debts, income, and necessary living expenses. The IRS determines how much money a taxpayer can afford to pay each month based on their income and necessary living expenses. They also consider any child support or alimony payments. They calculate the value of the taxpayer’s assets and subtract any debts to determine how much the taxpayer could potentially pay. The total amount is the minimum offer the taxpayer must make for an Offer in Compromise to be considered. This starts a pause in the time limit for the IRS to collect the unpaid taxes until a decision is made on the offer. OICs can be paid in three ways: all at once, in two years, or by the time the statute of limitations on collections runs out. The IRS will thoroughly investigate the offer and if it’s rejected, the taxpayer still owes everything. If it’s accepted, the taxpayer has to follow strict rules for at least five years. The OIC won’t help with other kinds of debt, like state taxes or credit card bills. Bankruptcy can be a good solution for someone who has a lot of different debts, including federal and state taxes, credit cards, and business debts. When someone files for bankruptcy, they may be able to get rid of all of these debts and start fresh. However, it’s important to understand that filing for bankruptcy means that the person will likely lose most of their assets. When taxes go unpaid, the IRS can put a lien on a person’s assets so that they can’t be sold or given away without the IRS getting paid first. Once the IRS files a notice of federal tax lien, everyone knows about the debt, and it’s harder to get rid of. The tax collector’s lien on your property will depend on where you live and how the tax debts are discharged. If the debts are dischargeable, the lien won’t attach to your home if the FTL is not filed in your county. However, it’s important to note that federal law does not recognize Florida’s homestead law, so your home is not automatically protected. Half of your home may be protected depending on how it’s titled and whether the tax debt is joint or individual. Trust fund taxes, like income and FICA taxes withheld from paychecks, are treated differently from other taxes. The employer can be a person, group of people, or a company. If the owners don’t have limited liability, the IRS can go after them for all the unpaid payroll taxes. But if the employer is a corporation or other protected entity, a law called I.R.C. §6672 can make the owners and others personally responsible for the unpaid taxes. This penalty is called the trust fund recovery penalty. It can’t be discharged in bankruptcy. Ch. 7 bankruptcy is when you lose all your stuff but don’t have to pay your debts. Ch. 13 bankruptcy is when you keep your stuff and pay off your debts over time with a plan. Some tax debts can be eliminated in bankruptcy (dischargeable), while others cannot be (nondischargeable). If a tax debt is dischargeable, it can be wiped out in a Ch. 7 bankruptcy or paid off for less in a Ch. 13 bankruptcy. If it’s nondischargeable, it has to be paid in full in a Ch. 13 plan and will still be owed after a Ch. 7 bankruptcy. Certain tax debts, like unpaid sales taxes or trust fund penalties, are always nondischargeable. Others can become dischargeable if enough time has passed since the tax return was due or filed, or if fraud was involved. It might be smart to wait to file for bankruptcy if your tax debt could become dischargeable with time. If you owe taxes and want to file for bankruptcy to get rid of them, here are the rules you need to follow:
1) You filed a tax return for the year you owe taxes for.
2) The tax return was filed more than two years ago.
3) The tax return was due (with extensions) more than three years ago.
4) The tax was assessed more than 240 days ago.
5) You didn’t commit fraud or try to avoid paying the taxes.
To figure out if you meet these rules, it’s best to get help from the IRS by filling out a form and getting official tax records. If you owe a lot of tax debt and also have other debts like credit cards or loans, filing for bankruptcy might be a good way to get a fresh start and get rid of all your debts, including taxes.
In short, if you owe taxes and want to get rid of them through bankruptcy, it’s important to follow the rules and get help from the IRS to make sure everything is done correctly. If you owe a lot of money in taxes, filing for bankruptcy might be a better option than trying to negotiate a deal with the IRS. This is because when you make an offer in compromise (OIC), the IRS looks at your income and assets, including your spouse’s, and may not accept your offer. Also, an OIC doesn’t help with state taxes or other debts, while bankruptcy can help with both. So, if you’re struggling with a big tax debt, bankruptcy might be the best way to get relief. In conclusion, if you have a client who is struggling with tax debt, it may be better for them to file for bankruptcy rather than try to negotiate an Offer in Compromise. This is because bankruptcy can provide more advantages and protections for the client. Additionally, there are specific rules and requirements for filing taxes and assessing tax debt, so it’s important to make sure everything is done correctly to benefit the client. Larry Heinkel is a tax and bankruptcy attorney in St. Petersburg, Florida. He helps businesses and individuals with state and federal tax problems.
Source: https://www.floridabar.org/the-florida-bar-journal/eliminating-irs-tax-debts-why-bankruptcy-may-be-better-than-an-oic-to-resolve-your-clients-tax-debts/
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