By now you may have heard that Taxmasters has filed for bankruptcy relief. You probably saw their commercials on television. They promised to help you reduce your IRS tax debt to pennies on the dollar. More technically, they would assist folks in making “offers in compromise” to the IRS. This is a perfectly legal strategy that requires a taxpayer to file IRS Form 656 to the IRS, and it’s usually filed when the total amount of tax debt is considered uncollectible.

This got me thinking about an alternative to an offer in compromise.

I will switch over to the Chapter 13 bankruptcy venue, and show how it could help someone with an IRS income tax lien. I’ll give you a real life example, a small business owner, who had credit card and business-related unsecured debts of about $30,000. After looking at his situation, I determined that he qualified for a Chapter 7 filing in every way.

His ears perked up though when I proposed a way for him to eliminate a $40,000 IRS tax lien. The IRS had filed its lien several years back and it was for income tax incurred 6 years prior. The client had long worried about what the IRS could do to him.

I suggested that we look into filing a Chapter 13 bankruptcy. This particular client didn’t own much property. His vehicle was 10 years old and he didn’t own a house. He had some used business equipment. In all, he owned about $6,000 of property. So, our Chapter 13 plan sought to pay off the secured value of the lien (which was his $6,000 of property) and provide for the IRS’s statutory interest rate (this rate varies, but currently it’s 3 per cent).

The nice thing is that the IRS Bankruptcy Department understands very well how to respond to such a case. The IRS files its papers in Bankruptcy Court and separates its claims into secured, priority and unsecured compartments. The secured part has to be paid at interest; the priority debt must also be repaid in full, but at 0 per cent interest, and the unsecured tax debt.

The bottom line for this particular client was that his Chapter 13 plan was $275 a month for 5 years. In 5 years, all of his debts, including the IRS tax lien, will be paid off or wiped out. In addition, I was able to quickly file his case within about a week to provide him with Bankruptcy Court protection.

Everyone’s case is different, and things all depend on individual circumstances.

If you have comments or questions, please let me know!