Taxation & Estate Planning

Tough economy + aggressive IRS = tax bankruptcy.

By howardlevy

All recent indications are that the IRS is plowing ahead in its collection efforts under a weakening economy.  Revenue Officers continue to push hard, and there are no signs that Automated Collection Service has backed off its levy and lien filings.

The unfortunate result of this pressure is that more and more clients are turning to a tax bankruptcy to resolve IRS problems.  The advantages of a tax bankruptcy are often significant.  Here are a few:

     1.     Bankruptcy stops the IRS and releases levies and seizures. 

     A tax bankruptcy immediately secures the release of an IRS levy on bank accounts and wages, and stops seizures of assets like houses, cars and business equipment.  This is absolute under bankruptcy law - once bankruptcy is filed, all collection actions must stop, including those of the IRS (this is referred to as a “stay”).  In most cases, bankruptcy frees property from the IRS the same day it is filed.

     2.     Bankruptcy ends IRS discretion in its case handling.

     Once bankruptcy is chosen, it is no longer just up to the IRS.  IRS personalities and procedures yield to bankruptcy law.  Installment agreements that could not be agreed to under IRS standards may be obtained in a Chapter 13 repayment plan.  Chapter 13 adds the benefit of stopping the accruals of interest and penalties while payments are made, a virtual impossibility with direct IRS negotiations.  Taxes that could not be solved by an administrative IRS offer in compromise can be eliminated in a Chapter 7. 

     3.     Bankruptcy eliminates taxes, interest and penalties.

     Income taxes owed on returns that were actually filed with the IRS more than 2 years before the bankruptcy and were due to be filed with the IRS more than 3 years before the bankruptcy can be wiped out in a Chapter 7.  Bankruptcy is a powerful means of IRS resolution on these older income taxes.  If the bankruptcy rules are met, all the taxes, interest and penalties will be gone after a Chapter 7 bankruptcy is completed (usually 4-6 months).  

     4.     Bankruptcy is an alternative to an offer in compromise. 

     The IRS is accepting only 25% of compromises.  The IRS offer in compromise program has historically been an good source for resolving unpaid taxes.  With the current low acceptance rate, the reality is the IRS offer program is now broken.  Because of that, filing a tax bankruptcy on the government has become a viable option for a fresh start with the IRS.   

     5.     Bankruptcy is a complete solution to all debt problems.

      A tax bankruptcy solves IRS problems, but it also can eliminate state taxes, overwhelming credit card debt, well-intentioned medical bills, debt from a failed business - and it stops foreclosures.  With the present state of the economy, a comprehensive “all in one” solution to financial problems can take priority.

More details on handling taxes in bankruptcy can be found in my recent article for the Journal of the National Association of Enrolled Agents.

Full post as published by IRS and the Law on March 21, 2009 (boomark / email).