Paying Income Tax Debt: Chapter 13 Bankruptcy vs. IRS Installment Agreement

Now that the April 15^th tax filing deadline has passed, many tax debtors are facing the dilemma of how best to pay past due tax liabilities and are weighing the advantages of a chapter 13 bankruptcy repayment plan over an IRS installment agreement.

Certainly, filing a bankruptcy case is usually a last resort, but for many, it can be the best solution.  Some tax debtors might be eligible to simply wipe out all of their tax debt in a chapter 7 “straight” bankruptcy.  Others, however, who might be ineligible under a chapter 7, will have to pay the IRS all or part of the amounts owing.  Chapter 13 allows tax debtors to pay off the IRS on terms prescribed by the Bankruptcy Code, not the Internal Revenue Code.   The bankruptcy plan is advocated by the tax debtor’s own lawyer and administered by the Bankruptcy Court, not the IRS. 

So, here are some of the benefits of chapter 13 bankruptcy over an IRS installment agreement: 

• Reducing the total tax debt owed: Under an IRS installment agreement, a taxpayer is required to pay all tax liabilities in full.  Bankruptcy, however, may allow a tax debtor to reduce or even altogether eliminate tax liabilities for certain years. 

• Stopping accrual of interest and penalties: Under an IRS installment agreement, interest and penalties continue to accrue during the term of the agreement.  Under a chapter 13 bankruptcy plan, interest and penalties stop as of the date of the filing of the bankruptcy petition.  So, every dollar paid toward the tax debt in the bankruptcy case reduces the tax liability by a dollar.  Moreover, the tax debtor is assured of being tax debt free within five years. 

• Establishing the amount of the monthly debt repayment:  Under an IRS installment agreement, the IRS determines the amount of the payment based upon IRS “living expense standards” – IRS approved categorized budget amounts.  Under a chapter 13 bankruptcy plan, the amount of the payment is determined based upon the tax debtor’s actual living expenses, possibly resulting in more affordable and flexible budgeting. 

• Staying collection activities:  The IRS requires strict compliance with the terms of the installment agreement and can levy taxpayer assets upon default.  In a chapter 13 bankruptcy case, the IRS is prohibited from engaging in any sort of collection action without prior approval from the bankruptcy judge. 

Since 1986, The Rothbloom Law Firm has represented Atlanta, Georgia individuals seeking relief from their federal and state tax debts.  Our attorneys are experienced at assessing whether a debtor’s tax liabilities can be reduced or eliminated in Chapter 7, Chapter 13, and Chapter 11 cases, and are also experienced and equipped to litigate dischargeability disputes with taxing authorities.  Contact us today to discuss whether bankruptcy may allow you to receive a fresh start from your tax and other debts.