Every IRS problem has a solution. Some solutions are quick. Other workouts require more creativity, planning and patience. When meeting with a client – or during an initial telephone consultation – I like to discuss the following options and how each might fit in towards the ultimate goal of a fresh start:
1. Offer in compromise. This is the first option on every one’s mind. But it can be difficult to obtain an compromise under current IRS procedures – it is not for everyone. Many compromises are initially rejected by the IRS and have to be appealed. And with IRS expense allowances lower than what most people need to live, the best chance of success is to be pretty much broke. The IRS compromise program is not dead, but caution needs to be exercised and other options reviewed first to avoid disappointment.
2. Tax bankruptcy. I emphasize this all the time – with the results of the IRS compromise program difficult to predict, bankruptcy is often the next best option. A Chapter 7 bankruptcy can eliminate an income tax liability without any recovery to the IRS and without losing any of your property. A Chapter 13 bankruptcy can allow you to continue or set up an installment agreement to repay your taxes without interest and penalties. In many Chapter 13’s, the amount of tax repaid is less than what you actually owe.
3. Uncollectible. The IRS does make “bad debt” decisions on its collection inventory. This is known as being uncollectible. To be a bad debt, the IRS will require a financial statement listing income, living expenses, assets and liabilities to prove that any attempt to collect the debt would result in a hardship. Sometimes, the IRS will put an older tax debt in its nonactive queue on its own. It is important to carefully analyze and understand when to call the IRS, and when to let sleeping dogs lie.
Next: IRS installment agreements, statute of limitations and interest/penalty abatements (Part II).