IRS Offer in Compromise within Bankruptcy?
I was recently asked if the IRS would consider accepting an offer in compromise as part of a settlement in bankruptcy. The first thing you may be thinking is, "What? I didn’t think you were able to bankrupt taxes." Well, the truth is that you can bankrupt some taxes; however, there are several criteria that must be met before income taxes can be discharged in bankruptcy. We won’t approach that question on this post, but I assume that you have chosen to go ahead and pursue bankruptcy because you have additional debt you are trying to discharge along with your income taxes.
Once you file for bankruptcy and the stay is initiated, the IRS cannot collect against you and they won’t begin to negotiate with you regarding your tax liability until you are discharged from bankruptcy. So, technically, you cannot use an offer in compromise to negotiate your taxes while you are in bankruptcy. However, once you are discharged from bankruptcy, you will know exactly what taxes have been discharged in bankruptcy and which taxes have not been discharged and you can focus on getting the remainder of your income taxes settled by an offer in compromise.
Usually, at the end of a bankruptcy, you are generally in a good place for an offer in compromise. This is because you generally do not have a lot of equity in your assets remaining at the end of your bankruptcy.