You have tried and failed at settling your tax debt with the IRS – your offer in compromise was rejected – and are now considering bankruptcy for relief from the taxman.
But before you jump in with the bankruptcy filing, it is important to understand how your offer in compromise could have complicated success with your bankruptcy discharge.
The bankruptcy code has several rules that must be followed to discharge a tax debt. Most of the timing rules are based on the passage of time, including the time an offer in compromise was pending with the IRS.
An offer in compromise can upset the timing rules and delay your bankruptcy filing.
There are three primary timing rules when it comes to filing bankruptcy after an offer in compromise was submitted.
The first timing rule requires that your bankruptcy must be filed more than three years after your tax return was due to be filed. This is known as the Three Year Rule.
The second bankruptcy timing rules involves the date you actually filed your tax return. If you filed your tax return late, the bankruptcy must also be filed more than two years after the return was filed. We call this the Two Rule.
The third rule is that bankruptcy must also be filed more than 240 days after the IRS placed your tax debt on its books (called an “assessment”). This is the 240 Day Rule, and is where your offer in compromise comes into play and could trip up your bankruptcy filing.
If you filed your offer in compromise within those first 240 days after the IRS placed your tax debt on its books (“assessment”), the clock stops, and the 240 days stops running. That’s not a good thing, because the passage of time is essential to discharging taxes in bankruptcy.
That’s right, the bankruptcy code has specific language that limits the dischargeability of taxes if an offer in compromise was filed within 240 days of assessment.