Do you have a tax dispute with the Internal Revenue Service (IRS)? Are you thinking about filing for bankruptcy? Starting the bankruptcy process could impact how your tax dispute ends. Gain an understanding of IRS methods and strategies for solving tax disputes, and be confident about your case.

Filing a bankruptcy case may be one factor supporting some form of settlement of your tax dispute. However, the IRS generally won't settle just to avoid a trial. Settlements are more likely when the dispute involves disagreement on factual issues, and not questions on the law.

Sizing Up Settlement Options

Several factors the IRS looks at when considering a settlement are:

Chances of an IRS Win at Trial

The IRS weighs a settlement of your dispute against the chances it will win if the case goes to court. The legal term for this is weighing the "hazards of litigation." The IRS doesn't want to go through the trouble of going to court if it's going to lose. It also looks at factors such as costs of a lawsuit and the needed manpower. Another risk is a court decision against it, which could affect the outcome of future tax dispute cases.

Can the IRS Collect?

The IRS is more willing to settle if it doubts its tax claim will be paid in the bankruptcy case. "Doubt as to collectability" means looking at factors such as whether or not there are claims in line ahead of it that will be paid first. When a tax debt isn't eligible for discharge, and you'll remain responsible for it, the IRS is less likely to settle the claim.

Other Options to Pay Tax Debts

The IRS has an Offer in Compromise form for taxpayers who can't pay the full amount of a confirmed tax liability. The bankruptcy court can force the IRS to consider an offer in compromise by a taxpayer who has filed for bankruptcy. However, the court can't make the IRS accept the offer.

Government Lawyers and Your Bankruptcy Case

Attorneys for the US Government may enter your bankruptcy case at any stage. Generally, an objection to the tax claim will trigger a referral to the US Department of Justice (DOJ). When a referral to the DOJ is made, the case is assigned to the DOJ Tax Division.

Before a case is referred to the DOJ, the IRS usually keeps the power to settle tax disputes under the same procedures that would have applied if there were no bankruptcy case. Once a referral is made, a different set of rules apply. The amount of the claim determines who has the final say to a settlement. There are added levels of review and approval for larger claims.

The Tax Division's policy is not to make offers to settle cases. It only responds to offers made by taxpayers. However, its attorneys will work with taxpayers in negotiating proposals that they can recommend for approval. You negotiate a proposal and submit it in an "offer letter." Government attorneys prepare a report on the offer and make a recommendation, the Tax Division reviews it, and accepts or rejects it.

Bankruptcy Court Authority in Chapter 11 Cases

A tax dispute is generally beyond a bankruptcy court's reach if it arises after a Chapter 11 plan is confirmed and the tax in dispute involves a tax period after the confirmation. In some situations, the Chapter 11 plan allows the court to keep authority to handle a case.

However, this power doesn't allow the bankruptcy court to determine post-confirmation tax liabilities. Each taxable period is separate and distinct, so subsequent tax disputes create a new case between the taxpayer and the US Government.

Taking care of a tax dispute can be complex, and your bankruptcy attorney can best help you understand the issues in your case and the best way to resolve them, once and for all.

Questions for Your Attorney

  • What factors does the US Government consider when determining whether to accept or reject a settlement offer?
  • Is it better to try to work out a settlement with the US Government if there's a tax dispute?
  • Can I be held liable to the US Government if my money is exhausted by claims that have higher priority than the tax claims?