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How Offers in Compromise Are Considered

May 25, 2026July 17, 2020 by Brotman Law

Let’s talk a little bit for a second about Doubt as to Collectability Offer in Compromise, the successes and the more common ones. So, Doubt as to Collectability Offers in Compromise fall under a specific set of guidelines. Doubt as to Liability Offers in Compromise are based on a formula that is the quick sale value to find by the IRS at 80% of the value of the taxpayer’s assets plus the positive monthly cash flow times 60 months. If a taxpayer is showing $10 and positive monthly cash flow over 60 months, that’s $600. A hundred dollars a month in positive monthly cash flow, that’s $6,000. A thousand dollars a month in positive monthly cash flow, that’s $60,000. Positive cash flow is really important from an Offer in Compromise standpoint because little changes in the positive monthly cash flow of the taxpayer really affect the minimum offer amount that the IRS will accept. When determining whether your client is an Offer in Compromise candidate, one of the best things to do is ask the client what assets do you have? List out the assets that they have, determine what their value is, meaning not with the client’s assessed value is but with the quick sale value of the client of the asset is. Then, take those assets and list the client’s income and expenses out, and figure out what their positive monthly cash flow is if any and then, that gives you an idea of what their minimum offer amount is. That’s a really great trick to pre-screen Offers in Compromise.

Key Takeaways

Let’s talk a little bit for a second about Doubt as to Collectability Offer in Compromise, the successes and the more common ones. So, Doubt as to Collectability Offers in Compromise fall under a specific set of guidelines.
We have a policy in our firm of pre-screening offers and compromises even before we get ready to submit to them to the IRS.

Issues in the Offer in Compromise Process

May 25, 2026July 17, 2020 by Brotman Law

The next thing I want to talk about, I want to talk about some issues associated with Offers in Compromises. The first issue I wanted to discuss is what we call dissipated assets. A dissipated asset is an asset that the taxpayer has disposed of, that the IRS is going to count towards their reasonable collection potential or their minimum Offer in Compromise. For example, this happens all the time. People will liquidate their IRAs and they will go out and spend money on all sorts of things. They’re going on vacations or trips or food or whatever. The IRS will come back and they’ll say, “Wait, the $100,000 in this IRA, what happened to the money?” The taxpayer will throw their hands and then go, “I don’t know. We just spent it.” The IRS goes, “That $100,000 of money should have been used to pay your tax liability. So, we’re going to consider this a dissipated asset.” Dissipated asset comes up all the time with property. They come up with IRA’s securities. Basically, you need to be able to substantiate to the IRS the money that was used with the dissipated assets was recently spent on ordinary and necessary living expenses, what other things that the IRS are going to accept. It’s really important that the outset to identify any dissipated assets that you might have, otherwise you might make an Offer in Compromise only to be disappointed at the end. The next issue I want to talk about is valuation. Valuation is a really hot topic within the IRS and it’s something that practitioners use all the time to present the client’s financials in the best light possible.

Key Takeaways

The next thing I want to talk about, I want to talk about some issues associated with Offers in Compromises. The first issue I wanted to discuss is what we call dissipated assets.
One of the examples I’ll give is for the house. You have a house and you go ahead and Zillow and the house is worth $500,000. Then you go on the property tax, coming to assessor’s website and the tax assessor says it’s worth $350,000.
If the physician is unemployed even for an extended period of time, they’re not making any income, they have no positive cash flow, the IRS is still going to make the argument that they have the ability to go out and earn more money.

Taxes and Bankruptcy

May 25, 2026July 17, 2020 by Brotman Law

Some income taxes can be discharged in bankruptcy — but the rules are specific, and most people are surprised by how narrow the qualifying window actually is.

Bankruptcy is not a blanket solution for tax debt. Whether your taxes survive or get wiped out depends on which taxes are involved, when the returns were filed, when the IRS assessed the liability, and a few other conditions that have to be met simultaneously. Get them all right, and the tax is gone. Miss one, and it survives the bankruptcy as if you never filed.

The Three-Year, Two-Year, and 240-Day Rules

To discharge income taxes in bankruptcy, three timing conditions must all be satisfied at once.

The three-year rule: the tax return for the year in question must have been due at least three years before you file your bankruptcy petition. So for tax year 2020 — with a return due April 15, 2021 — the earliest a Chapter 7 petition could potentially discharge that liability is April 2024. If you file bankruptcy in February 2024, the 2020 tax debt is not eligible.

The two-year rule: you must have actually filed the return at least two years before the bankruptcy petition. Filing late doesn’t disqualify you outright, but it does push the discharge window further out. If you filed your 2020 return in October 2022, the two-year clock runs from October 2022, not from the original April 2021 due date.

The 240-day rule: the IRS must have assessed the tax at least 240 days before your bankruptcy filing. Assessment usually happens when the IRS processes your return, but it can also result from an audit, an amended return, or a CP2000 notice. If the IRS assessed additional tax from a 2020 audit in January 2024, that assessment doesn’t become eligible for discharge until September 2024.

Taxes That Cannot Be Discharged Regardless of Timing

Several categories of tax debt are non-dischargeable no matter how old they are.

Payroll trust fund taxes — the portion of employee withholding that an employer holds in trust and remits to the IRS — are non-dischargeable under 11 U.S.C. § 507(a)(8). The IRS treats these as money that never belonged to the employer in the first place. If you owe a Trust Fund Recovery Penalty (Form 4183) as a responsible party of a business, that liability follows you through bankruptcy.

Taxes related to fraud or willful tax evasion are also non-dischargeable. If the liability arose because you filed a fraudulent return or deliberately evaded tax, bankruptcy doesn’t help. The same applies to taxes on returns that were never filed at all — the IRS files a substitute return on your behalf, but that is not treated as a return you filed for discharge purposes. You generally have to file the actual return yourself, and it has to be filed before the bankruptcy petition.

Chapter 7 vs. Chapter 13 for Tax Debt

Chapter 7 can fully discharge qualifying income taxes; Chapter 13 puts non-qualifying taxes into a repayment plan, often without additional penalties accruing during the plan.

In a Chapter 7 case, taxes that pass all the timing tests and the fraud/willfulness tests become non-priority unsecured claims and are discharged along with credit card debt and medical bills. There is no repayment — the liability is gone.

Chapter 13 is more useful when some taxes qualify and others don’t, or when you have assets you want to keep. Priority tax claims — the ones that don’t pass the tests — get paid through the Chapter 13 plan over three to five years. The advantage is that the IRS generally cannot accrue additional interest or penalties on those claims while the plan is active. For someone with a large payroll tax liability or recent income taxes, Chapter 13 can reduce the total cost even without achieving a full discharge.

What Happens to a Federal Tax Lien

Discharging the underlying tax debt does not automatically remove a filed federal tax lien.

The discharge eliminates your personal obligation to pay — what lawyers call the in-personam liability. But if the IRS filed a Notice of Federal Tax Lien before your bankruptcy petition, that lien is a secured interest in your property. It stays attached to assets you owned at the time of the bankruptcy, even after the discharge. To remove the lien, you typically need to either pay the secured portion or ask the bankruptcy court to avoid the lien through an adversary proceeding.

This distinction catches people off guard. They complete the bankruptcy, assume the tax debt is gone, and then find the lien on their property when they try to sell or refinance. Check the county recorder’s records and pull an IRS transcript before assuming the lien isn’t a factor.

This Requires Both a Bankruptcy Attorney and a Tax Attorney

The tax discharge analysis and the bankruptcy filing are two separate disciplines, and most general bankruptcy attorneys don’t do the tax side carefully.

The discharge eligibility rules — especially the tolling provisions, which can pause and extend all three timing periods based on prior bankruptcy filings, pending Offers in Compromise, or Collection Due Process hearings — require someone who understands both bodies of law. A bankruptcy attorney can file the petition. A tax attorney needs to verify whether the taxes actually qualify before you do.

Frequently Asked Questions

Can you discharge IRS debt in Chapter 7 bankruptcy?

Yes, but only income taxes that meet the three-year rule (return due at least 3 years before filing), the two-year rule (return actually filed at least 2 years before filing), and the 240-day assessment rule — and only if the return wasn’t fraudulent and the tax wasn’t willfully evaded. Payroll taxes, recent income taxes, and taxes on unfiled returns do not qualify.

Does filing bankruptcy stop IRS collections?

Yes. Filing any bankruptcy chapter triggers an automatic stay under 11 U.S.C. § 362, which immediately halts most IRS collection activity — notices, levies, garnishments. The stay lasts for the duration of the bankruptcy case. The IRS can request relief from the stay in limited circumstances, but it typically does not pursue collection while the stay is in effect.

What happens to a tax lien after bankruptcy?

The discharge wipes out your personal liability for the tax, but a previously filed Notice of Federal Tax Lien survives and remains attached to property you owned before the bankruptcy. To clear the lien from property, you either pay the secured value or seek lien avoidance through the bankruptcy court. The lien does not extend to property you acquire after the petition date.

If you’re weighing bankruptcy against other options for resolving tax debt, the five-part discharge eligibility test walks through the specific conditions in more detail — or see our overview of other options for resolving tax debt if bankruptcy isn’t the right fit. Book a free 15-minute call if you want to talk through which approach makes sense for your situation.

Have a Tax Question or Notice?

If you’re dealing with an IRS audit, collection action, California state tax matter, or any other tax issue, we can review your situation in a free 15-minute consultation.

Schedule a Free Call → Or call: (619) 378-3138

IRS liens so I want to talk briefly about IRS liens

May 25, 2026July 17, 2020 by Brotman Law

Key Takeaways

Topic: IRS liens so I want to talk briefly about IRS liens
Read the full article below for complete details on this topic.

IRS liens so I want to talk briefly about IRS liens IRS lien or lean in general is a security interest in a piece of property so an IRS lien it represents the government’s interest in the personal and real property of a taxpayer a tax lien has the effect of attaching to all the taxpayers real and personal assets and in the event of the taxpayer goes to sell one of those assets the government it has a claim to that money now in actuality liens really serve two purposes number one they attach to property and make it really difficult to sell houses and occasionally it can make it really difficult to sell vehicles or larger items of personal property to believe those that are registered with the DMV and secondly it leans have a very negative impact on a taxpayer’s credit and their ability to borrow now the officially the policy statement from the IRS is that liens are used to preserve the government’s interest but there is a big debate between. The IRS and the tax practitioner community on what the efficacy of liens are particularly where a taxpayer doesn’t have any assets for the government to secure because the government likes to say that leaves are a necessary measure of preserving a security interest we would argue that the liens are a punitive measure that really only impacts a taxpayer’s credit particularly you have a case where taxpayer has entered into installment agreement that will full pay a liability and the IRS goes and files lien anyway that is a particularly hot topic of debate, but an IRS tax lien can be dealt with in one of three ways you can withdraw you can ask the government to withdraw the lien meaning that the gleam effectively never happened and will completely disappear from a tax payers credit the government can release.

IRS levies. A levy is a seizure of property or assets.

May 25, 2026July 17, 2020 by Brotman Law

Key Takeaways

Mostly what IRS levies are associated with is our bank levies.
The IRS will come in and will levy a taxpayer’s account.
Liens do not immediately effect property in terms of seizing that property.

IRS levies. A levy is a seizure of property or assets. Mostly what IRS levies are associated with is our bank levies. The IRS will come in and will levy a taxpayer’s account. Levy is different than liens. Liens do not immediately effect property in terms of seizing that property. A levy is a seizure. So, the IRS can levy bank accounts. They can levy accounts receivable. They can levy brokerage accounts or other financial assets. Levies are often a source of stress for taxpayer and when we get the majority of our levies clients, “Hey, the IRS wiped out my bank account.” Levies can be defeated with a number of things. The most important thing to defeat a levy is prevention. You want to make sure that you’re working with a revenue officer or with a CS to avoid any levies. When levies are issued it is important to fight them. You can fight them I numerous ways. The easiest way to fight a levy is to substantiate a documented hardship with the IRS.

Interest and Penalty Abatements

May 25, 2026July 17, 2020 by Brotman Law

Interest and penalty abatements. One of the more commonly complaints that we get around our office is the amount of interest and penalties that are tapped on to liabilities. A taxpayer will call us up and say, “Hey, we owe $20,000 to the IRS but they charged another $20,000 in interest and penalties that we didn’t even know them. Is there anything that we can do about the interest and penalties?” The short answer is “yes,” particularly with respect to the penalties. IRS interest abatements are very difficult to get. The IRS fears interest as what they are entitled to because of a delinquent tax liability. The IRS interest rate usually is pretty low. It’s usually defined by the statutory interest rate. It’s usually between a 3% and 6%. So, it’s usually not that big of a killer. The killer is the penalty portion of it. The penalties are often substantial. They can raise anywhere from 10% to 75% and they can turn a small liability into a fairly substantial one really, really quickly. Penalty abatements are governed through Section 20 of the Internal Revenue Manual.

Key Takeaways

Interest and penalty abatements. One of the more commonly complaints that we get around our office is the amount of interest and penalties that are tapped on to liabilities.
It is that particular part of the manual dictates on the “reasonable cause.” Reasonable cause is the circumstances that led to the reason that the taxpayer was penalized.
The IRS will go through a series of questions with the taxpayer representative. If they find a reasonable cause, and they will automatically abate penalty on the spot. This is a great advance in penalty abatement and makes things much, much quicker.

Innocent Spouse Relief

May 25, 2026July 17, 2020 by Brotman Law

Key Takeaways

Innocent spouse requires several things and I want to be clear about those from the onset.
First of all, you must have some sort of understated tax in the return that you had no knowledge to.
If your spouse runs a business and they understated their tax liability and you had no knowledge of it, then you could potentially be a candidate for a innocent spouse.

Innocent Spouse relief. Innocent spouse relief is a fairly hot topic of conversation particularly among family lawyers and those individuals who are going through separations because oftentimes these people feel that they wrongly injured by their spouse or significant other’s tax liability. Innocent spouse requires several things and I want to be clear about those from the onset. First of all, you must have some sort of understated tax in the return that you had no knowledge to. If your spouse runs a business and they understated their tax liability and you had no knowledge of it, then you could potentially be a candidate for a innocent spouse. You also have to show that when you sign the return you have no knowledge of the liability and do not benefit from it. That is a particularly tricky proposition because oftentimes if one spouse is cheating on their return or understating liability then the other spouse is receiving some indirect benefit of that whether it’s increased cash or to the household or some other financial gain. The IRS will not grant innocent spouse relief in those cases.

Differences Between the Federal Tax System and the California State Tax System

May 25, 2026July 17, 2020 by Brotman Law

Key Takeaways

Briefly I want to talk to you about differences between the federal tax system and the state tax system.
Most FTV actions are initiated from the Sacramento office whether they are levis, phone calls, contacts with tax payers, or any sort of collection actions.
The states have limited resources at the local level.

Briefly I want to talk to you about differences between the federal tax system and the state tax system. As I mentioned, due to limited resources state are usually more aggressive in their collection tactics and their examination tactics than the federal government and the principal reason for this is because taxation for the states is the principal source of revenue racing. A lot of times when there is a budget shortfall the state will lean on their self tax and the federal tax bureau will lean on the income tax to help mandate collections priorities and help raise revenues either through collecting past due liabilities or examining returns and finding new ones. In general, the states because of their limited resources will rely more on in voluntary collections actions than field representatives so there’s much greater reliance at the state level for collections processes that are instituted from a remote location so for example in California the main center of operation for the FTV which is the Franchise Tax for the State of California income tax bureau is in Sacramento. Most FTV actions are initiated from the Sacramento office whether they are levis, phone calls, contacts with tax payers, or any sort of collection actions. The states have limited resources at the local level.

California State Specific Tax Issues

May 25, 2026July 17, 2020 by Brotman Law

Key Takeaways

So now I’d like to talk to you about some issues with regarding that the states have specifically.
In California, we have a number of challenges in dealing with the state taxis that are either less of an issue or non-existent at federal level.
The first as I’ve kind of touched down earlier is overside.

So now I’d like to talk to you about some issues with regarding that the states have specifically. In California, we have a number of challenges in dealing with the state taxis that are either less of an issue or non-existent at federal level. The first as I’ve kind of touched down earlier is overside. There is usually less overside on cases than there is at the federal level. And I mean by that, is the auditor or the collection agent is given a lot more latitude in most cases to handle the cases as they see fit as long as it falls within the administrative guidelines. This particularly has an impact on the examinations process so a lot of the times the auditors are kind of given free rein to define the scope of what the audit is in sales tax or in particular they can do a really detail investigation and go through a number steps that you may not find in the federal process. As a result of this and as a result of the states having fewer resources, there is often times administrative delay when dealing with the state cases. For example, the time frame in California right now is if I were to represent a client in a sales tax audit and me and the auditor just agreed on the result and I filed and appeal, it would take anywhere from 8 to 12 months under the current structure to hear that appeal.

California Collection Tools Part One – Voluntary Compliance

May 25, 2026July 17, 2020 by Brotman Law

Key Takeaways

So, the first thing I’d like to talk about is I’d like to talk about some of the collection tools that the state uses to enforce collection against tax payers.
The state operates very much like the federal government.
It resorts to voluntary compliance whenever possible and uses involuntary compliance measures is kind of a step for dealing with tax payers that are not complying with what the states priorities are.

So, the first thing I’d like to talk about is I’d like to talk about some of the collection tools that the state uses to enforce collection against tax payers. The state operates very much like the federal government. It resorts to voluntary compliance whenever possible and uses involuntary compliance measures is kind of a step for dealing with tax payers that are not complying with what the states priorities are. In the case of California, the state will use voluntary compliance measures like letters to encourage tax payers contact, collection agents to Sacramento reach out to tax payers through phone calls, occasionally utilizing the local office to conduct field visits when they feel as appropriate and then try and encourage some sort of resolution of the tax account at hand. So, resolution from a state perspective means that all returns are filed and paid on time and in cases where there are missing returns they want the tax payer to file them. In cases where the tax payer hasn’t paid their balance then they want the tax payer to enter them to a satisfactory payment arrangement. Payment arrangements at the state level are a little stricter than they are at the federal level. As I mentioned, the tax payer doesn’t have the same set of rights that they do at the federal level so the state is generally more aggressive towards revenue collection than you will find at the federal level.

Have a Tax Question or Notice?

If you’re dealing with an IRS audit, collection action, California state tax matter, or any other tax issue, we can review your situation in a free 15-minute consultation.

Schedule a Free Call → Or call: (619) 378-3138