It’s possible to discharge some tax debts in New York bankruptcy, but the requirements can be difficult to meet, so it’s possible for debtors to not qualify for tax debt discharge. However, there is another option to slogging through an IRS tax debt: settlement. The IRS has a program called “offer in compromise,” which allows people to reduce their total tax liability. It’s not a cinch to meet the requirements for this either, but it’s doable. There are several requirements.
(1) Debtors cannot be in bankruptcy; their cases must be closed when the IRS debtor offers to settle the tax debt.
(2) Debtors must go back and file tax returns for any missed years.
(3) Debtors must pay their tax liabilities for the current year, and business owners must make their quarterly tax deposits.
(4) There is a $150 application fee, but that can be waived for debtors who meet the IRS’s “Low Income Certification” guidelines.
(5) When making the offer, debtors must send an initial payment. If the offer is to be paid in five or fewer payments over two years, the initial payment must be for at least 20 percent of the total offer. Otherwise, the initial payment must be a standard payment that’s in line with the offer. Payments must continue until the IRS accepts the proposal, and if it doesn’t accept it there are no refunds.
(6) Debtors who meet the “Low Income Certification” described above do not need to send an initial payment.
(7) Debtors must pay all their future tax payments to the IRS.
(8) Finally, the size of the offer itself depends on the number of payments the debtor offers. For debtors offering five or fewer payments in two years (as described above), the total offer must equal the debtor’s remaining monthly income (income from all sources minus expenses) times twelve. Otherwise, it’s the debtor’s remaining monthly income times 24.
More information can be found on the IRS’s Web site.
Offers in compromise can be difficult to set up, but they can be a good bankruptcy alternative for people who are ineligible or think it might be cheaper or more convenient than bankruptcy. There are, however, many cases in which tax debtors don’t qualify for a settlement with the IRS, such as when debtors’ earnings are too high or they own too much property. For them, chapter 13 bankruptcy can provide some of the benefits of paying down a tax debt even if it can’t be discharged. In these circumstances, it’s best to consult with an experienced New York bankruptcy lawyer.
For answers to more questions about tax debts, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced fair debt collection practices act Bruce Weiner for a free initial consultation.
