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Govt Prefers to Forgive Tax Debt over You Filing for Bankruptcy

Offer in Compromise vs. Bankrutpcy

The number one question we hear from our Clients with significant tax debt is "why would the IRS let me off without paying the income taxes I owe?"

The answer to this question lies in understanding what happens when a taxpayer who owes significant tax debt ($10,000.00 - $1,000,000.00) to the IRS or the State, files chapter 7 bankruptcy.

In the vast majority of cases, taxpayers are allowed to keep all of their "exempt-assets" and have their income taxes discharged by the United States Bankruptcy Court.

Debtor's in bankruptcy are generally permitted to keep 1) all the money in their retirement plans (unlimited), 2) their car(s), 3) their home(s), 4) their personal property (furniture, computer, TV, cell phone, etc.), 5) up to approximately $10,000.00 cash, and the IRS does not receive a penny.

These assets that a Debtor in bankruptcy is allowed to keep are called exempt-assets.

With an Offer in Compromise (OIC), the IRS and NYS Dept. of Finance generally requires taxpayers to use the exempt-assets to payoff their tax debts before they are relieved of the unpaid balance outstanding. The good news however is that provided all of the available equity in a taxpayer's possession are paid to the IRS, they will generally forgive the difference. 

For many taxpayers filing an OIC means the loss of significant assets and property. 

The Govt obviously prefers to receive some money versus nothing and therefore is willing to allow taxpayers to wipe out their tax debts by filing for an Offer in Compromise (instead of forcing them into bankruptcy).

Call us now for a free consultation at (718) 928-9607.

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CIRCULAR 230 DISCLOSURE: Per regulations governing practice before the Internal Revenue Service, any tax advice contained herein is not intended or written for use, and cannot be used, to avoid tax penalties that may be imposed on the taxpayer.

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