Settling Debts to the IRS after a Chapter 7 Bankruptcy

Unfortunately, many obligations to the IRS cannot be discharged in a Chapter 7 Bankruptcy. However, the IRS since the Great Recession of 2008 has shown some compassion in compromising amounts due to them. Their formal process is explained pretty clearly here, and I recommend you review that page. As your Austin bankruptcy attorney, I can help you through what is called the Offer in Compromise (OIC) process.

It is very common for a bankruptcy caused by unforeseen personal calamities to also result in unpaid federal income taxes. The total amount due grows larger quickly as it accumulates significant interest and penalty charges, and the IRS will usually file a general lien against you. They will contact you periodically, ask for updated personal information, and, depending on your particular circumstances, will decide if they want to enforce the lien by taking assets from you or garnishing your wages or even your Social Security payments. If you attempt to close a real property transaction while you are subject to a lien, even if you are receiving or dispensing no funds, the IRS will show up at the table and must approve the closing. The IRS is only interested in liquid assets or real estate and normally won’t take away daily-use tangible items like vehicles. They, might, however, come after a prized gun collection that can easily be sold.

If your assets and income are such that there is no practical way for you to pay the full amount due to the IRS in a reasonable period of time on an installment plan, you should submit an OIC to settle the matter and get the lien released. For example, if you owe $50,000, you might offer $2,000. You’d have to pay 20% of your offer, or $400, plus a $186 fee when you file the OIC, with a promise to pay the remaining balance of $1600 in five or fewer payments. With your OIC you must submit a form 433-A, which is a full disclosure document of all your personal finances. I can help you with that as needed; accuracy and detail there are very important.

The IRS will typically assign an examiner to your OIC, and he or she may request more documentation, particularly if you have any business interests that aren’t easily quantified. That examiner may recommend acceptance of your offer as is or may make a take it or leave it counter. A regional supervisor must then ultimately approve the deal but is unlikely to overrule the examiner you’ve come to know. If you accept the counter and pay it in full within five months, your lien will be released, and your only remaining obligation will be to file and pay timely tax returns for the next five years. If you fail to do that, the OIC is eradicated, and you have to start over. That’s not something you want to risk!

If, however, you believe the counter offer is unreasonably high, you have the ability to appeal. That’s where having an attorney represent you is your most prudent course of action. I can do my best to keep the IRS demands within bounds until your tax obligation is resolved. There is no way to guarantee the percentage you will have to pay on an OIC. You’ll see lots of advertisements talking about 10 cents on the dollar, and that may well be the outcome. But, every case is different, and the examiners follow pretty strict formulas to arrive at a number that the IRS will accept.

Doing nothing with respect to an IRS lien is never a good option. The bankruptcy laws are designed to give you a fresh start, but you’ll be hamstrung forever if you have significant IRS obligations. They will not be forgotten, and the OIC process is a great alternative for you.