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Tax Debt and Bankruptcy Blog

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By Michael S. Anderson of Anderson Tax Law logo for Arizona tax attorney Michael S. Anderson P.C.
  • Tax Debt as a result of IRS Audit? Do I have options?

    samp01The result of an IRS audit is often a balance due.  We are often asked several questions at the end of an Audit as a result.  Questions like:

    • Will the IRS accept an amount less than what I owe and forgive the balance?
    • Will the IRS agree to a payment plan?
    • Will the IRS place a lien on my property if I am in a payment plan?
    • Can I use Bankruptcy to get rid of the debt?

    Shortly after the audit related debt is placed in the IRS’ books it will start shooting letters to you.  “Balance Due” letters and “Final Notice” letters will issue over a period of several weeks.  You’ll receive a letter at the end of the string of letters called a “Final Notice of Intent to Levy”.  This letter is important because it provides you the ability to challenge collection action by the IRS and request an alternative solution IF you properly reply to it within 30 days of it’s mailing date.  The time between the assessment of the new debt and the date you get to discuss alternative solutions with the IRS usually provides enough time to analyze and plan your case.

    Back to the common questions above:

    Will the IRS accept an amount less than what I owe and forgive the balance?

    The IRS will settle the debt IF you can prove that your “reasonable collection potential” (RCP) is less than the amount of the debt during an Offer in Compromise proceeding.  Proving your RCP isn’t done by discussing your situation with the IRS.  It is based on a formula.  The formula is simple in theory, but the majority of people who try and prove that their RCP is low enough to require settlement of the debt…fail.

    They fail for all sorts of reasons, but primarily because the filers aren’t great candidates.  Or in other words, the RCP is high enough that the IRS believes it can collect all of the debt before the statute of limitations on collections runs out.

    No matter what the IRS Offer in Compromise calculator you are seeing online says about your RCP, be skeptical, and get a second opinion from someone experienced with the process.

    If you are a good candidate for an Offer in Compromise, then the answer to the question is yes, the IRS will likely settle the debt for less than what is owed and forgive the rest.

    Will the IRS agree to a payment plan?

    Yes in almost every case.  There are several types of payment plans and which type you request and end up getting will depend on the amount of the debt, the time left in the statute of limitations period, your income, your budget, the budget the IRS believes you should have and your assets.

    The most common type of payment plan(s) we see are streamlined plans.  The debt in these types of plans are less than 50000.00 and the taxpayer can afford to pay the balance over 72 months.  These types of plan allow the taxpayer to avoid submitting a full financial statement and if done properly can even prevent the filing of an IRS lien.

    If the taxpayer can’t afford to pay the debt over 72 months or if the debt is greater than 50000.00, than the solution becomes a bit more complex and the factors mentioned above become very important in determining how much a payment plan will be.

    In some situations it is possible to convince the IRS to take very small amounts each month or even nothing each month even if the debt is very high.

    Will the IRS place a lien on my property if I am in a payment plan?

    If the debt is less than 25000.00 and you enter into a certain type of payment plan, the IRS won’t record a lien notice.  If they already have they will release it and even withdraw it from your credit report if you follow certain steps.

    If the debt is less than 50000.00 and no lien notice has been recorded AND you enter into a streamlined payment plan that allows the IRS to take the payment from your bank or pay, the IRS won’t (or shouldn’t) file the notice of lien.

    If the debt is above 50000.00 or one of the above two situations don’t apply, bets are off.  You can expect the lien and will have to formally request that the lien notice not be filed and have a very good reason why it shouldn’t be.

    A successful Offer in Compromise will result in a lien release as will an eventual bankruptcy where the debt is paid or discharged and there are few assets for the lien to remain attached to.

    Life after an IRS audit involves dealing with the IRS Collection Division.   In audits that result in money owed,  it is recommended to be pro-active and to understand the next step that awaits you – IRS collections.  There is no substitute for preparation.

    Can I use bankruptcy to get rid of the tax debt?

    A very strong…”it depends” applies here.  Bankruptcy will discharge an obligation to pay income tax debt, penalty on income tax debt and interest on penalty and income tax debt.  It will also discharge the obligation on certain other types of tax debt…but two things have to be true:

    1.  The tax debt has to meet the criteria for discharge both date criteria and other criteria.  (Learn More)

    2.  You need to be a good candidate for bankruptcy.

    If you have new debt which is the result of an audit, the debt won’t be dischargeable in bankruptcy from a date standpoint for at least 3/4 of a year depending on how old the tax year is.  It may be 3+ years before it is dischargeable in bankruptcy from a debt standpoint.

    We have many clients who use bankruptcy to deal with tax debt but these types of cases require real analysis, comparison to other options and usually some time spent in a payment plan before bankruptcy ends up making sense.

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