An Offer in Compromise or a Bankruptcy Which is Better For You?
Richard Fonfrias, J.D.
Chicago's Financial Rescue & Bankruptcy Lawyer
Fonfrias Law Group, LLC
You'll see that an offer in compromise has more negatives than a bankruptcy. Even so, choosing one or the other depends on your specific circumstances, so make sure you speak with a bankruptcy lawyer before making your decision.
- Some types of taxes can be completely erased in bankruptcy.
- If the taxes can be erased, they are guaranteed to be erased.
- A Chapter 7 Bankruptcy can usually be concluded in roughly 4 months.
- Your bankruptcy will show up on your credit report.
- A tax lien will survive bankruptcy and be attached to any equity you had before the bankruptcy. For example, equity in your home.
- An OIC will not go into your file at the credit bureau.
- All tax liens are erased as soon as you pay your settlement.
- The amount of the settlement is whatever you negotiate with the IRS. The law does not allow you to settle for $0. And whether your offer is accepted is solely at the IRS's discretion. Even if your presentation to IRS is perfect, they could reject your offer.
- It can take as long as six to nine months for the IRS to accept your OIC. If you go through the IRS Appeals process, the process could take over one year.
5 Key Facts to Consider Before You File an Offer in Compromise
Disadvantage #1: You must strictly adhere to the terms of the Offer in Compromise for five years before it will be final. The IRS makes sure you follow the agreement to the letter for five years. The IRS has the legal right to revoke your OIC is you owe even one cent for a specific period. Once revoked, then the entire tax liability falls on you.
Disadvantage #2: An OIC suspends the Statute of Limitations for the IRS to collect taxes from you. The IRS has ten years from the assessment date to collect taxes you owe. An OIC, however, suspends the statute of limitations. This means that if five years have passed since the IRS assessed taxes against you, then the IRS still has five years to collect taxes from you. And even if you file an OIC now and it takes the IRS one year to consider it, the IRS will still have five years to collect taxes from you if it rejects your OIC.
Disadvantage #3: Once the IRS accepts your OIC, you may not further contest the compromised amount in court. This means if your OIC is accepted, you cannot contest the original amount IRS says you owe.
Disadvantage #4: The law allows IRS to keep all previous payments. When you file an OIC, you must make a down payment or start making monthly payments, depending on the OIC you submit. If IRS rejects your OIC, it can they keep all of the money you paid during the time it was under review, if the payments were required. Also, if you are due a tax refund in the same year that your OIC is accepted, the IRS will keep your refund and will not credit the amount toward your OIC. Instead, the amount of your refund will go toward your past due tax liability.
Disadvantage #5: You may transform some of your compromised tax into non-dischargeable tax. If you file an OIC, you may cause a tax liability that was dischargeable to become non-dischargeable, unless the prescribed time for the taxes having been assessed has expired. The normal period for taxes to become non-dischargeable is within 240 days of filing bankruptcy. When you submit an OIC, the period is extended to270 days plus the number of days the OIC is pending.
Which is right for you? An Offer in Compromise or a Bankruptcy.
Make sure you contact a qualified bankruptcy attorney who can help you ways the pros and cons of an OIC in your situation. Bankruptcy is usually a good choice under these circumstances:
- When the taxes would be discharged, and you need to file bankruptcy because of other creditors.
- When the taxes would be erased, and the IRS has denied your OIC.
- If taxes are the only debt that you're concerned about.
- If you are concerned about what a bankruptcy will do to your credit score.
- If you want to get a Federal Tax Lien released.
An OIC offers many of the same protections as bankruptcy. By law, once you file an OIC for consideration, the IRS cannot issue any new garnishments or levies against you. In addition, we can take other steps to release existing garnishments and levies after an OIC is filed.
Can I File an Offer in Compromise and File Bankruptcy?
Not at the same time. IRS will not consider your OIC while you are in bankruptcy. This means if you want to file both, you must do so in sequence.
If you file bankruptcy first, you cannot file an OIC until after your bankruptcy has been discharged.
If you file an OIC, then you cannot file bankruptcy until after your OIC is accepted.
If you have submitted your OIC but it's still under consideration, and you file bankruptcy while the OIC is being considered, the IRS will reject the OIC and you will have to wait until your bankruptcy has been completed before you submit a new OIC.
And if your OIC is accepted, and then you file bankruptcy before paying your OIC, the IRS will file a tax claim for the full amount due during the bankruptcy proceedings.
The only reason to file an OIC and bankruptcy is if your taxes cannot be discharged in the bankruptcy.
Obviously, this is a complex area of law, which is why I recommend that you keep an open mind and consult a qualified bankruptcy lawyer who can help you make an informed decision.