Among the options to consider in dealing with the IRS is whether bankruptcy might be a viable alternative. Sometimes it is the only option. Typical situations in which bankruptcy should be considered include the following:
- Creditors have become very aggressive in collecting debts. IRS may be threatening, or has already executed, a seizure of assets, levy on bank accounts, or other enforcement action.
- The amount of debt is out of proportion to the individual's or business' ability to pay.
- The business has been losing money for some years and the prospects for profitability are uncertain.
- Some taxes, such as income taxes, may be dischargeable in bankruptcy. (See article entitled Discharge of Taxes in Bankruptcy) If a satisfactory arrangement cannot be reached with the IRS, either through a Payment Agreement or an Offer in Compromise, bankruptcy may become a viable option, especially if there are other debts.
In some cases bankruptcy should be considered as an option even if the taxes are not dischargeable. A common example would be non-dischargeable payroll taxes. If the business is struggling financially and runs up several quarters of payroll tax liabilities, the IRS may threaten to seize the business' assets or even shut it down completely. In that situation a Chapter 11 bankruptcy may be the only viable alternative to keeping the business in operation. A plan of reorganization in a Chapter 11 bankruptcy may give the business an opportunity to repay the tax liability (and other debts) over a period of five or six years, which is often more than the IRS will allow administratively to “pyramiding” taxpayers.
In some situations a Chapter 13 bankruptcy may be appropriate. One common example would be a taxpayer who has equity in a home and does not want to lose it in liquidation bankruptcy or in a foreclosure proceeding by the lender and/or mortgagee. Chapter 13 gives the debtor up to five years to pay off any non-dischargeable debt while keeping possession and ownership of his property. A small, unincorporated business may also use the Chapter 13 to continue to operate while it pays off the creditors through a plan. A Chapter 13 is less expensive than a Chapter 11 bankruptcy and is well suited to small businesses in the right circumstances.
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