Is an IRS Installment Agreement Better than Bankruptcy?

No, but it’s the next best thing. An IRS long-term repayment plan is usually a good option for people who don’t qualify for bankruptcy or cannot overcome severe bankruptcy-phobia.

Bankruptcy qualification usually isn’t a problem. If people don’t qualify for tax debt discharge, which is likely, they usually qualify for Chapter 13 repayment plan bankruptcies. Bankruptcy-phobia is a different story. A few people have such an irrational fear of bankruptcy that they cannot bring themselves to file voluntary petitions.

A Chicago bankruptcy lawyer is an important partner in either proceeding. Attorneys run interference with the IRS and often lower the amount due. Attorneys also provide solid legal advice through the long, and usually complex, consumer bankruptcy process.

Installment Agreements

IRS collection, or even the threat of collection, can, quite frankly, make life miserable. Fundamentally however, the IRS doesn’t want to harass taxpayers. Instead, the government wants the money.

Under the revised Fresh Start Program rules, the IRS normally accepts any repayment plan offer that retires the entire unpaid balance before the collection statute of limitations, which is normally between seven and ten years, takes effect. Penalties and interest continue to accrue until the past-due balance is paid in full. The IRS normally suspends collection activity if the taxpayer is current.

As outlined below, bankruptcy automatically stops IRS collection activity, regardless of the amount of delinquency. Furthermore, the IRS usually cannot continue to add penalties and interest while the debtor is in bankruptcy.

Pretty much everything is negotiable in these situations, including the terms of repayment and the amount due. Frequently, a Chicago bankruptcy lawyer convinces the IRS to reduce the amount due, especially if the taxpayer makes some concessions, like making higher monthly payments.

Discharge in a Chapter 7

Normally, government-related unsecured debts, such as SBA loans, are dischargeable in bankruptcy. But unpaid taxes are priority unsecured debts. They’re only dischargeable if the debtor clears three hurdles:

• Taxes are at least three years old,
• Returns have been on file at least two years, and
• Debt hasn’t been assessed in the last 240 days.

“Assessment” is an accounting term which basically means “adding up.” Usually, IRS accountants assess tax debt before they send letters that include the total amount due.

In addition to debt discharge, Chapter 7 bankruptcy has other advantages, such as the Automatic Stay and asset protection.

Generally, Section 362 of the Bankruptcy Code immediately takes effect and bars all creditor adverse actions, such as bank account levy and wage garnishment, until the judge closes the bankruptcy. Asset protections in Illinois include home equity, vehicle equity, and retirement accounts. Exempt assets cannot be liquidated.

Repayment in a Chapter 13

The specific discharge rules, especially the 240-day assessment rule, often render past-due income taxes nondischargeable.

Sometimes, a bankruptcy lawyer files a Chapter 7 and makes a motion to discharge the tax debt anyway. One of the fundamental rules of litigation is that you don’t get anything unless you ask. In a borderline situation, or if the taxpayer has absolutely no money or assets, the IRS often agrees to discharge.

Failing discharge, Chapter 13 gives taxpayers up to five years to repay allowed claims, including past-due income tax. The terms are based on what the debtor can afford to repay, not on what the IRS demands. Furthermore, as mentioned, the IRS usually can’t collect the debt under any circumstances. Finally, in most cases, the government can’t add penalties and interest, as that would violate the Automatic Stay.

Work With a Thorough Cook County Lawyer

No matter what kind of financial problem you are having, bankruptcy could be a way out. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC.

Source:

irs.gov/payments/payment-plans-installment-agreements