You Can Eliminate Taxes in Bankruptcy, Sometimes…

This week, I had a potential client come into my office to discuss debts to the IRS from many tax years ago.  The amount owed was sizable–enough that streamlined (a much easier process) installment agreements or offers in compromise were not possible.  In addition, I usually like for a CPA to review my clients’ returns to see if amending them makes sense, but the most of the tax years at issue in this case were outside the usual 3-year statute of limitations for amendments.  The potential client mentioned to me during our initial phone call and meeting that he wanted an offer in compromise.  Many people want them.  Of course they do.  If accepted, an offer in compromise will allow their debt to the IRS (I’d say the largest, most powerful collection agency in at least the US) to be settled at cents on the dollar.  Nevertheless, I’m always skeptical about offers in compromise because I know that historically the IRS has rejected the vast majority of them.  The most recent statistic I’ve seen shows the IRS accepted less than 40%, and this percentage was substantially higher than those from previous years.  Considering that an offer in compromise could take me literally weeks of legal work to complete, the client is not likely to have much funding, and the client may not even qualify for the offer in compromise, I try to keep in mind other collection alternatives.  In this context, I suggested to the potential client that we considering seeing if filing for bankruptcy would be a less expensive and time-consuming option than an offer in compromise.  His response was “You can eliminate taxes in bankruptcy?  My tax advisor up north told me you can’t.”  Well, yes, you can.  Sometimes.  In many cases, bankruptcy can be an effective way of eliminating old debt to the IRS.

Instead of going into detail in this post as to when bankruptcy will discharge debt to the IRS, I will refer you to this excellent article by Howard Levy, Esq.  Mr. Levy provides a detailed, easy-to-understand overview of eliminating debt to the IRS in bankruptcy.


Want to further discuss these issues?  Contact me at 954-944-3929 or nrumbak@rumbaklaw.com.

*This document contains legal information, but does not contain legal advice.

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