Your Bankruptcy’s Effect on an Existing Offer In Compromise
Richard Fonfrias, J.D.
Chicago’s Financial Rescue & Bankruptcy Lawyer
Fonfrias Law Group, LLC
If you file bankruptcy during an offer in compromise, your OIC may still be good.
Here’s how it works.
If you accepted the terms of an OIC, the IRS treats your OIC as a an “executory contract”. This is a contract made by two parties that contains terms that each party will carry out at a future date. It states that both parties have duties to perform before the contact is complete.
The IRS gives you the option to assume (agree to continue the contract) or reject the contract, whichever you choose. Your bankruptcy does not invalidate your OIC.
Chapter 13 Bankruptcy.
Example #1: You have approved an OIC, but you have not satisfied all the terms at the time you file a Chapter 13 bankruptcy. IRS will likely file a “protective claim” in the amount of your entire tax bill, and not the amount of your compromise. Then IRS can legally collect the full amount of your unpaid taxes in case you do not abide by the terms of the OIC.
Example #2: You file Chapter 13 bankruptcy and in your plan, you state that you will “assume” the contract and continue paying the amount as promised. This means you will honor the OIC and make payments during your bankruptcy.
If you assume the OIC, then you have not broken the contract and your payments to IRS will be spelled out in your bankruptcy. The payments will be the same as if you had not filed for bankruptcy. And IRS must honor your OIC by accepting those payments.
So your choices are as follows: (1) assume your OIC in you bankruptcy plan, (2) pay the entire tax due through your plan, or (3) remain liable for all the taxes due, as if no OIC was ever made and accepted.
If you assume the OIC in your Chapter 13 bankruptcy plan – and then if you later convert your Chapter 13 case to a Chapter 7 bankruptcy – IRS may claim the full amount of taxes due, as if no OIC were ever made.
In your bankruptcy plan, if you do not assume the OIC – or if you do not make arrangements for paying your full tax due – then IRS will probably object to your plan.
The most commonsense way to honor the terms of your OIC is to continue making your payments. In this way, your OIC doesn’t become part of your bankruptcy plan.