HOW DO I REPAY MY TAX DEBT IN MY BEST INTEREST?
Taxpayers have six options in dealing with a tax debt:
1. Pay in full immediately
2. Payment over time
3. Settlement based upon a taxpayers not being able to pay the taxes
4. Settlement based upon the taxpayer not being liable for the taxes
5. Bankruptcy under Chapter 7
6. Bankruptcy under Chapter 11 or Chapter 13
- Pay in full immediately. If you agree the debt is owed and you have assets the lease expensive method of repaying the tax debt is simply paying the debt. This method avoids increased penalties and interest for failing to pay the tax. You probably would be on e-bay if this was possible.
- Payment over time. This method is usually called an installment agreement. The advantage of an installment agreement is that the Internal Revenue Service will frequently agree to allow the Taxpayer to repay over time. The fee charged by the IRS is $43.00. Interest and penalties will be added to the balance. A lien may be filed by the Internal Revenue Service. The payments are applied to older liabilities first. The IRS is free to renegotiate if income changes. The disadvantage of this method is that the payments may be wasted when considered with the results obtained in bankruptcy.
- The taxpayer may propose paying less than is owed because the Taxpayer does not have the resources to repay the taxes.. This is commonly called an Offer In Compromise. The basis for the offer in compromise is there is doubt as to collectibility of the debt. Frequently, you will see a reference or advertisement to settle your liability for cents on the dollar. Don’t be misled. Any settlement is for cents on the dollar. An offer in compromise requires disclosure of the financial assets of the taxpayer as well as the potential to repay the taxes over time. An offer is very time consuming and there are many factors to consider that may extend the time the Internal Revenue Service or other taxing authority has to collect the taxes, commonly called the statute of limitations for collection. The IRS normally has 10 years to collect the tax after it is assessed. Not all offers are accepted. Most are rejected. The offer must be at least the minimum shown in the offer in compromise worksheets. A successful offer will result in a contract between the taxpayer and the taxing authority that when completed resolves the debt and liens. The offer in compromise will take time for the Internal Revenue Service or other taxing authority to process.
- The taxpayer may propose paying less than is claimed to be owed because there is doubt that the liability is correct. The basis of the offer in compromise is doubt as to liability. This is a fairly rare method.
- Chapter 7 bankruptcy may discharge the tax liability. The requirements to discharge the tax liability in a Chapter 7 bankruptcy are that the debtor file a Chapter 7 and obtain a discharge from the U.S. Bankruptcy Court. The taxes must be more than three years old at the time of filing the bankruptcy plus any extensions of time, the taxes must have been filed for two years prior to the filing of the bankruptcy, and any additional tax must be assessed for more than 240 days. Additionally, the taxes can not be secured under a properly filed Federal Tax Lien.
- Chapter 13 or Chapter 11 may discharge the taxes. This is a form of repayment plan called a reorganization. If the taxes have aged sufficiently they may be dischargeable without being fully paid. This is an excellent method of handling unpaid taxes as well as late mortgage payments, medical bills, and unpaid credit card debt. These bankruptcies must be evaluated by an experienced attorney to determine if the taxpayer can benefit.
Rarely will there only be tax debt. Usually, tax debt is the tip of the iceberg. The entire financial picture should be considered. Failure to consider all of the financial situation may result in the loss of property to other creditors, lawsuits, and pressure from creditors not being paid.
The taxpayer filing a bankruptcy must choose from the three types of bankruptcies filed to aid a taxpayer with a tax debt. These are Chapter 7, Chapter 11, and Chapter 13. All of these types of bankruptcy are under the United States Bankruptcy Code. Each has advantages and disadvantages. An attorney experienced in bankruptcy is needed to advise you.
William F. Kunofsky is experienced in the area of bankruptcy as well as taxation and is able to help you understand which bankruptcy is best for you.
When you owe tax debts you should consider the qualification of the person representing you. Installment agreements and Offers in Compromise may be filed by enrolled agents, certified public accountants, and attorneys. However, only an attorney should advise you in the consideration of the filing of bankruptcy. Certified Public Accountants and Enrolled Agents are limited by law in the areas in which they may represent you. The advice received from one of these professionals does not normally consider all of the options available to the taxpayer. An attorney should evaluate your financial problem prior to deciding on what option to consider on paying your tax debt.
William F. Kunofsky is not certified by the Texas Board of Legal Specialization. William F. Kunofsky may be a debt relief agency that files bankruptcy under the United States Bankruptcy Code.