Offers in compromise

Here at Shenwick & Associates, many of our personal bankruptcy clients have issues with tax debts that they're looking for our guidance on. The issue of taxes in bankruptcy is a complex one that we've covered in a prior post.

However, there are many circumstances in which taxes are not dischargeable in bankruptcy, including taxes that were recently assessed or for which a tax return was recently filed. One alternative for debtors who are looking to either reduce or pay their tax debts that aren't dischargeable in bankruptcy is an offer in compromise (OIC). OICs are available to both individuals and businesses.

In evaluating an OIC, the IRS will consider several factors, including: 

• Ability to pay;
• Income;
• Expenses; and
• Asset equity.

Preparation of an OIC package requires a detailed listing of the debtor's income, expenses and assets. The process starts by preparing a Form 433-A (OIC) (Collection Information Statement for wage earners and self–employed individuals). The Form 433-A (OIC) is an eight page form in which the debtor must list all of his or her financial information and calculate their future remaining income. Along with any available individual equity in assets and available business equity in assets, this becomes the basis for the debtor's offer amount to the IRS.

Based on these results, the debtor will submit a Form 656 (Offer in Compromise) along with the appropriate backup Collection Information Statement, a non–refundable $186 application fee and an initial payment (also non–refundable).

Keep in mind that there are some factors that may make a debtor ineligible for an offer in compromise:

• The debtor must not be in an open bankruptcy proceeding;
• The debtor must have filed all required federal tax returns;
• The debtor must have made all estimated tax payments; and
• The debtor must have submitted all required federal tax deposits (if they are self–employed and have employees)

We file OICs for clients. For more information about how you and your family can reduce or eliminate your tax debts, please contact Jim Shenwick.