Tax Solutions: Offers in Compromise; Discharge in Bankruptcy; Payment In Chapter 13

Tax Debts

Options for Resolving Tax Debts

“I have some tax debts, but I know you can’t do anything about those.” 

We have heard this from potential clients many times.

Fortunately, this isn’t the case. You could have several options for dealing with tax debts. 

These strategies include:

  • Settling the debts with the Internal Revenue Service and Franchise Tax Board (sometimes called an “Offer in Compromise”),
  • Discharging some non-priority taxes,
  • Paying priority taxes over time in a Chapter 13 bankruptcy
  • Paying through an installment plan set up directly with the taxing authorities.

Offer in Compromise (Settling Tax Debts)

Sometimes the Internal Revenue Service (IRS) and the California Franchise Tax Board (FTB) are just like any other creditor. Sometimes they will settle with you. This is called an “offer in compromise.”

An offer in compromise allows you to settle your tax debt for less than the full amount you owe.

An offer in compromise might be a good option if you can’t pay the full tax balance, or doing so would make it impossible to pay your necessary living expenses.

In evaluating your offer to settle, the taxing authorities consider several factors: 

  • Your ability to pay (income vs expenses);
  • Income;
  • Expenses; and
  • Asset equity.
  • You must be current on all tax returns 
  • You must not currently be in an open bankruptcy
  • You will need to pay a fee when you submit your offer
  • You  may be required to pre-pay some settlement amounts.

Taxes and Chapter 7 Bankruptcy

Bankruptcy filers can sometimes discharge (wipe out) non-priority income tax debts in Chapter 7 bankruptcy. 

 Several criteria must be met for the taxes to be dischargeable, non-priority tax debts.

To get started, you will need to order copies of your federal tax account transcript. Order a transcript for each tax year you are trying to discharge.

If you have California Franchise Tax Board taxes, you will need to order copies of your Franchise Tax Board account transcripts.

Taxes and Chapter 13 Bankruptcy

Even if your taxes are priority taxes, you might still get significant help from a Chapter 13 bankruptcy.

Chapter 13 can help with taxes the following ways: 

  • Spread out mandatory payments over a longer period of time (without interest)
  • Reduce or eliminate some tax penalties
  • Reduce or eliminate some tax liens if the lien exceeds the present value of the asset it is attached to
  • Discharge any leftover non-priority debts at the end of the Chapter 13 repayment plan.