Offers in Compromise and the Use of Bankruptcy to Resolve Tax Liabilities

There is an old biblical adage that states “you cannot get blood from a stone.” This is never more true then when you owe money to the tax man.

An all too typical situation . . . you are a business owner having cash flow problems. In order to make ends meet, you decide to use money withheld for employee taxes, sales tax or meals tax to pay ongoing expenses. After all, even though you are a fiduciary for the federal and/or state government, no one from the revenue department is sitting their making sure you collect and pay over your taxes to the government. It’s done on the honor system and your thought is you will catch up later. Of course, later never comes and you are suddenly facing a staggering personal tax liability for your failure to collect and pay over withheld employee taxes, sales taxes or meals taxes. One day, in your mail arrives not the publisher’s clearing house winning ticket, but a notice from the taxing authorities that they intend to hold you as a party responsible for collecting and paying over fiduciary taxes liable for what is called in the law “trust fund taxes.”

Another all too typical situation . . . you are self-employed and should be paying quarterly taxes on your earnings. For whatever reason, you do not and now, on April 15th, you are faced with a significant unpaid tax liability for all those unpaid quarterly filings.

In both cases, the taxing authorities send you a demand for payment. In a perfect world (and by now we know that that is not the case), you will have the money and simply write them a check. Your reality, however, is different. After analyzing your finances, you realize only too well that there is no way to liquidate your tax liability.

Faced with that prospect, what is a taxpayer to do? Your inability to liquidate your tax liability is not the end of the world. There exists a procedure called an Offer in Compromise (called an Offer in Settlement when dealing with the MA/DOR) that provides you with the opportunity to convince the taxing authorities that there is no way you can financially satisfy their liability which is established by offering the liquidation value of your assets in satisfaction of your tax liability and a future income analysis over a five (5) year period.

The Levine Law Office has been successfully providing counsel to taxpayers seeking to compromise their tax liabilities for over thirty years. We will do a liquidation analysis of your assets to determine the threshold amount of an acceptable offer. We will then analyze your allowable income and expenses to determine if you have a monthly surplus. Typically, an acceptable Offer in Compromise is an amount determined by i) the liquidation value of your assets at the time of making the offer and ii) your monthly surplus income, if any, calculated over five (5) years.

The possibility exists, however, that personal income taxes (the so-called trust fund liability taxes cannot be discharged in bankruptcy) may be dischargeable in bankruptcy. If you have a current personal income tax liability, a bankruptcy filing which discharges your tax liability may be a viable alternative to consider.

By filing a Chapter 7, you may be able to discharge your personal income liability. If your personal income tax liability is non-dischargeable, you may still be eligible for relief by the filing of a Chapter 11 or Chapter 13. In both cases, a three to five year repayment plan may be proposed and approved by the Bankruptcy Court. Unlike repayment plans negotiated directly with the taxing authorities, once you file bankruptcy, penalties and, in some cases, interest stops accruing on your liability. Your tax liability is fixed with a monthly payment that actually has an end in sight.

When working with clients beset by tax problems, we often try to work with their accountant in arriving at the most efficacious approach to the problem. At the Levine Law Office, we work with you and your accountant to ease the burden of your tax liability either through an Offer in Compromise or an appropriate bankruptcy filing.

The Levine Law Office – providing clear solutions for your financial confusion for over thirty years.