Filing Bankruptcy After an Offer in Compromise? Knowing the Dischargeability Date is Absolutely Critical!
So, your Offer in Compromise was denied and now you are filing Bankruptcy? It is critical that you understand the timing rules as they relate to the Dischargeability of IRS debts in Bankruptcy. The rule that trips up most taxpayers who file a Bankruptcy after a failed Offer in Compromise, is the 240-day rule.
There are three primary timing rules when it comes to filing bankruptcy and the Dischargeability of IRS debts.
The first timing rule requires that your Bankruptcy must be filed more than three years after your tax return was due to be filed. This is known as the Three-Year Rule.
The second Bankruptcy timing rule involves the date you actually filed your tax return. The bankruptcy must also be filed more than two years after the return was filed. We call this the Two-Year Rule.
The third rule is that Bankruptcy must also be filed more than 240 days after the IRS placed your tax debt on its books (also known as “assessed”). This is the 240-Day Rule and is where most taxpayers get tripped up post Offer in Compromise filing.
If you filed your Offer in Compromise before the 240 days of assessment has expired, you MUST allow the 240 days to expire post Offer release to meet this critical requirement. This likely means delaying the filing of the Bankruptcy. Many people fail to understand that post Offer in Compromise filing, there is a stay on ALL collection activities. This would include the assessment of any new taxes.
Note: After a decision has been reached in an Offer in Compromise, there is a 30-day period before the account can be moved back to collections. Therefore, Congress added 30 days to the 240 days in a post Offer in Compromise situations. This is bankruptcy code section 507(a)(8)(A)(ii)(I).
Example:
Let’s say you filed your last remaining outstanding return for 2017 on July 1st, 2018. The IRS assessed the return on September 15th, 2018.
After you filed your 2017 return, you immediately filed an Offer in Compromise on October 15th, 2018, 30 days into the within 240 days of assessment. It was rejected on December 13, 2019.
Since the Offer in Compromise was filed within 240 days of assessment, we must take the time remaining on the 240-day, add in the time the Offer was pending, plus another 30 days to determine the first available filing date to be able to include ALL tax debt in Bankruptcy.
Here’s the calculation of how much additional time your Offer in Compromise added to your bankruptcy filing date:
Time the Offer was pending: 424 days (14 months)
Date of the Offer Denial: December 13th, 2019, and assessment released.
Time left on 240 days when Offer in Compromise was submitted: 210 days (7 months)
Plus 30 days: 240 days from the time the assessment was released
Quick math recap: 210 days remaining on assessment + 424 days the Offer was pending + 30 days post rule = Date October 7, 2021
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.