Chapter 13 and Discharge of Taxes and Offers in Compromise

Many readers are aware that the goal of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (which became effective on October 17, 2005) was to limit the ability of individuals to file for chapter 7 bankruptcy protection. However for individuals who owe taxes that would be non-dischargeable in chapter 7 (due to the fact that the tax returns were never filed, the taxes are too new, the taxes are trust fund taxes or payroll taxes, etc.) chapter 13 may instead be the better option. In a recent bankruptcy case, In the Matter of Charles Peterson 2004 Bankr Lexis 1765, the United States Bankruptcy Court for the District of Nebraska ruled that taxpayers who file chapter 13 can use the offer in compromise procedure to reduce the amount of taxes they owe.

The IRS initially refused to consider the offer in compromise based on the Internal Revenue Manual, however the Bankruptcy Court in Peterson required the IRS to process the offer in compromise. Readers should note that the Peterson case is not binding in the Southern and Eastern Districts of New York but in the appropriate case it is a strategy that should be considered. Readers interested in information regarding the Peterson case should contact the undersigned.