Can the Threat of Bankruptcy be Used as Leverage in an Offer in Compromise?
The threat of Bankruptcy can be used as leverage in an Offer in Compromise case and can be a valuable tool. You would not want to use it as an idol threat because the Offer Examiner has all the information to determine of you qualify for Bankruptcy. Bankruptcy can have a big impact on an IRS Offer in Compromise. Below is an excerpt from the Offer Examiner’s instructions.
The Internal Revenue Manual 5.8.5.6(5) on reducing the value of a compromise from bankruptcy states as follows:
“Some situations may warrant placing a different value on future income than current or past income indicates…if a taxpayer will file a petition for a liquidating bankruptcy (Chapter 7) consider reducing the value of future income.”
It is important to know when bankruptcy can discharge taxes, to do this it often will need to be explained in detail to the IRS Offer Investigator, who may not be familiar with taxes and bankruptcy. The taxes being compromised would need to have been (1) due to be filed three years prior (2) filed two years prior and (3) the tax assessed 240 days prior to the potential bankruptcy filing.
When properly inserted into the compromise negotiations, Internal Revenue Manual 5.8.5.6(5) can have a significant impact on the value of a compromise. It can also avoid a bankruptcy filing by pushing a compromise over the goal line.
Here’s why:
- A Chapter 7 Bankruptcy can “discharge” a tax liability, on specific dischargeable tax debts.
- The IRS knows that any taxes discharged in Bankruptcy cannot be collected against the future income of the taxpayer.
- An Offer in Compromise is all about determining the Reasonable Collection Potential and a bankruptcy can have a significant impact on that value.
- If bankruptcy is “Plan B” to an Offer in Compromise, the IRS may reduce the value of future income to account for the limited collection potential.
Should you get help?
I have seen many people try to prepare their own OIC and fail because they do not fully understand the art of dealing with the IRS. Yes, you can submit an Offer in Compromise yourself but if you are trying to considerably reduce your debt, I recommend you rethink your position.
An “accepted” OIC is not the same as a “successful” OIC.
There is more to it. Sure, the average taxpayer can fill out the forms and after spending hours reading and rereading the instructions provide the substantiation needed for an application to be accepted. How do you measure success? To me, success is measured with an approval on the LOWEST DOLLAR AMOUNT the IRS will accept.
If you feel that you may be in over your head, or just want to get a second opinion, let’s set up a short call. To avoid the back and forth emails and phone tag, I have included a link to my Calendar https://calendly.com/taxman/tax-problem-resolution-initial-consultation. Let’s set up a 30 min. phone conference to get to know each other. The phone number to call is 855-829-5877 and my extension is 203.