Table 1 indicates some comparison of the conditions through which one may enter and take advantage of either offer-in-compromise or chapter 7 bankruptcy shown side by side for a partial comparison.
Table 2 involves a progression starting with an individual with tax debt only with additions to
property by category and with level income used only for fee waiver effects. Graduation of wealth going into either an offer-in-compromise or chapter 7 bankruptcy starts as a base case for one single person increases with three types of assets, each subsequent asset added to the prior asset, in this order: (money), (automobile), & (tools of the trade):
(A) Homeless, owns nothing, no income
(B) Individual with income lower than the lowest fee waiver threshold
(C) Individual, waiver ineligible with income slightly above the higher waiver threshold.
(D) Individual, waiver ineligible having Bank Cash $30,825
(E) Individual, waiver ineligible having Bank Cash $30,825 + automobile
(F) Individual, waiver ineligible having Bank Cash $30,825 + automobile + tools of the trade
Table 3 illustrates a magnitude of the advantage of either offer-in-compromise v. chapter 7 bankruptcy considering income only. Income drives the amount that must be repaid to IRS. Income also sets the cost of entry into either offer-in-compromise v. chapter 7 bankruptcy.
(G) Homeless, owns nothing, no income
(H) Individual, income between fee waiver threshold for bankruptcy and OIC
(I) Individual, income near the median income amount, computing an offer amount based solely on income.
Again, this analysis based upon exemptions available in Long Beach, California, Los Angeles County and will differ in other states. (1) To best indicate the divergent nature of these two remedies, a starting point is $0 homelessness (which enables fee waivers), and thence to a low income in excess of the higher fee waiver limit, then cash in the bank, and then a car, and lastly tools of the trade. Under the wild card rules, some available cash property is sacrificed to cover the greater of two
(2) $30,825 was chosen as it is the sum of the maximum cash exemption under the highest cash
alone exemption available to non-cash bankrupts.
(3) Car equity that matches the bankruptcy exemption (greater of the two exemptions $4312.50 and $5850) illustrates that the $1537 shortfall means that the $1000 “Exempted” bank account money is essentially committed to the collection potential as well as an additional $537 will be added to the commitment to the offer. Overall $1537 additional is committed to Offer, regardless of whether low income is below a national standards threshold.
(4) The Lump Sum offer form of offer-in-compromise is the most beneficial to the taxpayer, and it can be seen that a taxpayer with assets above the $1000 bank deposit, $4312.50 FMV car and $4470 tools adds directly to the collection potential offer. If taxpayer lives frugally and below some of the national standards (that don’t involve subtraction for actual), such as Food, Clothing and Misc; Public Transportation; & Out of Pocket Health Cost, the above-threshold assets add directly to the reasonable collection potential.
The other part of the contribution to reasonable collection potential is income minus necessary business
expenses and extraordinary expenses, which is too diverse and unique in each case to meaningfully
discuss beyond the base cases treated here. We see that in each case of (a) cash, (b) car, and (c) tools;
that bankruptcy is more generous. Everyone has some cash, most people have a car, and not everyone has “tools of the trade” But, the bankruptcy exemptions allow the taxpayer to exempt more value in each of the cited cases and before going deeply enough to begin to counter personal property exemptions unrelated to making a living.
Because table 2 involves asset categories having different threshold values, those relatively lower exemption threshold values for offer-in-compromise quickly consume the value of the initial cash exemption of $1000 in the offer-in-compromise case for the higher value of item’s bankruptcy exemption compared to the exemption for offer-in-compromise.
(5) National Standards not subject to subtraction for actual expenses include Food, Clothing and Misc ($727); Public Transportation ($217); & Out of Pocket Health Cost ($55) totaling $999, leaving between
$562.25 and $1603.00/mo. The maximum housing for LA county is $2258. For a single person living
alone, housing and utilities actual expenses should easily cost at least the $1603.00/mo at the upper end of the range in the row example. If this is the case, a $1 offer should be acceptable assuming all other categories don’t contribute to a higher reasonable collection potential. In the range the bankruptcy cost is $0 while the offer-in-compromise cost is $186 + $1 offer. Based just upon tax debt, bankruptcy wins.
(6) Monthly national standards of $999 + local automobile standard $273 = $1272. Also, assume the
$2258 LA county housing and utilities Monthly excess reasonable collection potential is $4830- $1272-2258 = $1300. 12 months of this excess is 12 x $1300 = $15,600. The filing cost of the bankruptcy is $335 and the filing cost of the Offer-in-Compromise is $186 + 20% of Offer ($15,600) or $8,725 with a full cost if accepted of $15,786. This creates a break-even if $15,786 of tax is owed (no discharge advantage).
Table 3 illustrates that, as to California, where income is less than ($9 – $15/hr) that most tax debts are discharged in both the OIC and bankruptcy cases. For income (>$15-$24+/hr), bankruptcy’s cash exemptions predominate.
For bankruptcy, if all tax is eligible for discharge, then it is discharged. This does not depend upon the amount of earnings nor the amount of tax. What this indicates, is that if tax debt is all the debt involved, that bankruptcy might be the more advantageous option, and especially for California taxpayers earning over $15 per hour. In other states the results will vary based upon the level and configuration of that state’s bankruptcy exemptions.
Bio: Curt Harrington advises tax clients in Los Angeles County and Orange County, California and may be reached locally as shown on the business web site https://patentax.com/ . His background is more completely seen on the biography page https://patentax.com/curt/ .
Curt looks forward to advising tax debtors and business startups in the Long Beach, California area, particularly with an approach to helping structure business relationships to reduce the negative economic exposure of the startup entrepreneur in opposition to government authorities that endanger startup principals. Curt looks forward to speaking with you at (562)594-9784.
Other Sections within this blog:
Instructive Warning Cases
Bankruptcy & Offer-In-Compromise – The Hot Dog Stand Paradigm
A Tax Debt Only Comparison of Offer-In-Compromise and Chapter 7 Bankruptcy in California Graduating From a Homelessness Base Case
How Far Can You Delay Paying Federal Tax Authorities Before Criminal Tax Evasion Charges are Filed?
Taxpayer First Act Credit Card Trap
There are Usually 6 Tax Choices At Any Given Point In Time
Tax Evasion Avoidance Learning Blog : https://rebrand.ly/TaxEvasionAvoidance ; articles include other articles Outside this blog:
USA V. RODRIGO LOZANO – Memorandum Opinion Invites Further Analysis (9/13/2019)
Full Disclosure (9/11/2019)
Civil Effect (9/28/2019)
Curt’s CriminalLaw.com Articles:
USA V. RODRIGO LOZANO – Memorandum Opinion Invites Further Analysis (9/13/2019)
Prerequisites for Imposing a Time Payment Fee Were Not Met (9/12/2019)
9th Cir. Unpublished Criminal Tax Evasion Case Indicating Full Disclosure as a Prerequisite to use of a “following in good faith” exception to “willful intent.” (9/11/2019)
New 9th Cir. Case With Potential Tax Evasion Effect – Civil Admissions Become Prosecutor Weapon against Non-Testifying Defendants (9/8/2019)
Know & Use the Burden of Proof in the Best Way (9/5/2019)
How Far Can You Delay Paying Federal Tax Authorities Before Criminal Evasion Charges are Filed? (8/10/2019)
Character (Habit)Evidence Can Show Impulsivity, But Not Simply Evidence Of Brain Injury (7/24/2019)
US v. RAYMOND LAMBIS ORDER TO SUPRESS STINGRAY TRACKING (DC SDNY) (7/18/2016)
9th Circuit Rejects “One Day Late Rule” for Late Filed Return Tax Dischargeability (7/18/2016)
Unpublished 9th Cir. Case shows (1) that KNOWLEDGE instruction for 18 USC §1001 can be waived; & (2) even ambiguous agent notes & no recording can get a conviction – Use Right To Silence!! (2/1/2015)
Other Articles Outside this blog:
Debt Control Extensive Outline (8/14/2019)
Pre-Startup Efficiency – Introduction (Parts 1&2) (2016)
9th Circuit Rejects “One Day Late Rule” for Late Filed Return Tax Dischargeability (2016)
Give My Start-Ups a Break! (2015)