What’s Better, an IRS Installment Plan or Bankruptcy?

Before 9/11, the IRS Commissioner was the real-life equivalent of Darth Vader. But since then, the IRS has rolled out initiatives like the Fresh Start Plan. The IRS decided that it wanted delinquent taxpayers to pay what they owe more than it wanted them to get in trouble. The Fresh Start Plan made installment agreements more widely available, but didn’t radically change the way they worked.

So, the comparison between an IRS installment plan and bankruptcy is really no comparison at all. As outlined below, bankruptcy has many more benefits than in installment plan, especially if a Chicago bankruptcy lawyer handles the filing and subsequent proceedings. The IRS gave its installment plans a cute new name in 2011. But only bankruptcy offers a true fresh start for distressed debtors and their families.

Installment Plan Nuts and Bolts

The biggest 2011 change to the installment plan program was the eligibility amount. Today, taxpayers who owe less than $50,000 are generally eligible for installment plan payout.

Monthly payment amounts are the other big qualification. The payments must be large enough to retire tax debt before the collection statute of limitation, which is normally ten years, takes effect. The IRS relaxed eligibility standards as well. Today, even people who can afford to pay their tax debt with two or three payments can spread payments out over two or three years, or even longer, once again depending on the SOL.

The IRS also streamlined the review process in 2011. In fact, for most taxpayers, the installment plan review process is almost nonexistent. They must simply file the proper forms.

However, there’s a catch. Penalties and interest continue to accrue while taxpayers are making installment plan payments. Furthermore, these payments, unlike regular tax payments, are not deductible.

Back Taxes and Bankruptcy

In a nutshell, past-due income taxes are normally at least partially dischargeable in a Chapter 7. Chapter 13 gives taxpayers up to five years to erase tax debt, regardless of the SOL date or any other factors.

Back taxes are priority unsecured debts in a Chapter 7 which are only dischargeable under certain conditions. These conditions are:

• Tax debt is at least three years old,
• Return on file for at least two years, and
• No assessment within the past 240 days.

“Assessment” is an accounting term which basically means “determining the total amount due.” Usually, a Chicago bankruptcy lawyer examines tax transcripts to find the most recent assessment date.

Debtors who don’t meet these requirements may still be eligible for partial discharge. If the judge refers the matter to mediation, which usually happens, the IRS has a legal duty to cut a deal that usually involves writing off some of the UPB (unpaid principal balance).

Discharge is also available in a Chapter 13. As a fallback, a Chicago bankruptcy lawyer adds the past due taxes to the monthly debt consolidation payment. The Automatic Stay prohibits the IRS from adding penalties and interest to the tax debt during the protected repayment period, at least in most cases.

 Work With a Detail-Oriented 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 debt consolidation attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Virtual, home, and after-hours visits are available.

Source:

irs.gov/pub/irs-news/ir-11-020.pdf