Offer in compromise (“OIC”) allows you to settle your tax debt for less than the full amount you owe. Sounds good, right? It is if you can get a good deal and afford to pay it. I don’t know what the success rate is for obtaining an OIC, but I know from my tax attorney colleagues and clients that have tried it is quite low. And to be frank, the fact that offers in compromise are the subject of cheesy late night commercials and even posted on cardboard signs at exit ramps does not inspire a lot of confidence on my part. But I know good offers are accepted by the IRS on occasion.
So what does an OIC have to do with bankruptcy? First, bankruptcy may be an alternative to an offer in compromise (or vice versa). Second, if you need bankruptcy protection, there are times when an OIC can harm you.
Bankruptcy or Offer in Compromise?
Part of my job as a bankruptcy attorney is to suggest feasible alternatives to bankruptcy. If you owe back taxes to the IRS or State Franchise Tax Board (FTB), do yourself a favor and look at both options. Speak to professionals versed in bankruptcy and tax settlement. We can get rid of taxes in bankruptcy so that you don’t have to pay any back, so long as certain criteria are met. Read here for the three year, two year and 240 day rules in discharging taxes.
But maybe there are other complications with your bankruptcy that merit exploring alternatives. Maybe you just don’t want to file bankruptcy (who does?) and want to look at the options. I’m all for this. But I am for this only if you speak with qualified professionals that give you frank and practical advice. If you read that cardboard sign at the off ramp and count your lucky stars that you found your solution, you are not making an informed decision. You are just hearing what you want to hear.
How an Offer in Compromise Can Harm You
Let’s say you meet the criteria for discharging your taxes in bankruptcy, but you want to try an OIC. By applying for an OIC, the criteria for discharging taxes is changed. Applying for an offer in compromise tolls the 240 day rule by at least 90 days. That means you have to wait at least another three months to file bankruptcy and get the taxes discharged, i.e., now you must wait at least 330 days in total since the last assessment. If there is no rush, then maybe it’s a non-issue. But if there is urgency, this can be really problematic. And note that I said “at least” 90 days. This tolling period is the subject of some controversy, and some courts may view the tolling period as longer in certain circumstances.
And look at your total financial world. If you have other debts, don’t get tunnel vision surrounding your taxes. An OIC deals with taxes only. If you pay the IRS ten cents on the dollar, that’s great. But what if you are behind on the mortgage, swimming in credit card debt or buried under student loans? If you are going to need bankruptcy protection anyway, don’t send a pile of money to the Internal Revue Service without first understanding your options. If you end up filing bankruptcy and could have included your taxes, don’t throw your hard-earned dollars away.
Image courtesy of chrisinplymouth.