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The Offer in Compromise is a tax settlement option by the IRS designed to provide relief to cash-crunched and tax-burdened individuals, by allowing them to settle their debts without having to pay the whole amount of their taxes due — which is why you might consider applying for an Offer in Compromise (OIC). Of course, the IRS is notorious for being conservative with whose OIC gets approved, with over 80% of all offers filed being rejected, but if you’re in the situation where you need to file an OIC, it doesn’t hurt to try.
That said, should your Offer in Compromise be rejected by the IRS, exercising “bankruptcy” and “not currently collectible” options are two ways in which you can discharge your tax debts and make a fresh start even when you have not been granted the Offer in Compromise. We’ll explore these two options in greater detail.
Option 1: File for Bankruptcy
Income tax debts can be discharged as per the rules quoted in Chapter 7 and Chapter 13 of the Bankruptcy Code. While Chapter 7 lists the eligibility criteria for discharging the entire amount of debt, Chapter 13 delineates a payment notion whereby you only need to repay some portion of your debts and the rest is discharged. However, your tax debt must fulfill the following five criteria before being considered eligible for discharge:
- At least three years have passed since the due date of filing the taxes. (It is noteworthy in this context that the due date also includes all extensions.)
- The tax return had been filed at least two years before you file for bankruptcy. This time period is actually calculated from the date you had filed the returns.
- The tax return filed had not been fraudulent or frivolous.
- IRS has made the tax assessment at least 240 days before you have filed for bankruptcy. This assessment may be made when you report a balance due, the IRS makes the final determination in an audit, or an assessment proposed by the IRS has been finalized.
- You are not guilty of evading taxes intentionally.
In this context, it is worth remembering that you are not eligible to file for bankruptcy if your tax debts are related to tax returns that you are yet to file. When you file for bankruptcy, you have to provide documentation and evidence of your latest tax return as well as offer evidence that you have filed the last four tax returns.
Option 2: Not Currently Collectible
As you may have guessed from its name, “not currently collectible” indicates that a taxpayer, either an individual or a business owner, is unable to pay his tax debts within the stipulated time period. However, the IRS grants this status to a taxpayer only after this federal department receives and approves of the evidence presented in favor of the claim.
If you are considering exercising this option to obtain tax relief, you will need to fill out Form 433-F, Collection Information Statement and provide evidence supporting your claims. You can submit the form to an authorized IRS officer or at the IRS Automated Collection System unit.
When the IRS declares that a taxpayer is “not currently collectible,” it is legally bound to stop all collection activities and this also includes garnishments and levies. And, if you have been granted this status by the service, you will also receive a yearly statement specifying the amount of tax that you still owe to the IRS.
You must remember that until the “not currently collectible” status is applicable to you, the 10-year statute of limitations related to collection of tax debts by the IRS is still in effect. This means that if the IRS does not collect the outstanding tax debts from you within 10 years, these will lapse and you will be cleared of all debts.
Which Option Should You Choose?
Now that you know about the two ways in which you can discharge your tax debts, either partly or wholly, the best thing to do is consult with an experienced tax consultant who can weigh the pros and cons of these options as they apply to your specific financial situation.