Tax Law Blog | IRS Tax Attorneys

Former hostage Terry Anderson, who was held captive in the Middle East for 6 1/2 years, has filed for bankruptcy.

In the chapter 7 bankruptcy filed Nov. 3, which was first reported by The Columbus Dispatch in Ohio, Anderson claimed $1.8 million in liabilities and $60,000 in assets.

Anderson was chief Middle East correspondent for The Associated Press when he was kidnapped in Lebanon by Iranian-sponsored terrorists. He was freed in 1991. He is now a lecturer at the University of Kentucky.

After being released, Anderson received a $26 million judgment in a lawsuit against Iran. In 2004, he lost an Ohio Senate race.

The bankruptcy filing lists 17 credit cards, some with debt related to a restaurant in the Virgin Islands.

Anderson did not immediately return phone messages.

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Health care reform supporters like Elizabeth Edwards, a breast cancer survivor and wife of former presidential contender John Edwards, cite research that both the insured and uninsured are facing bankruptcies for overwhelming medical bills.

The share of bankruptcies attributable to health care costs rose by 50 percent between 2001 and 2007. Some 62 percent of bankruptcies in 2007 were “medical.”

Fiscal conservatives question the study’s objectivity because the authors, like Edwards, are on record for taking sides in the contentious health care reform debate and urging a single-payer national health program.

With their eye on an estimated $1 trillion debt from President Obama’s health care reform plans, critics point to Federal Reserve reports that found medical debt rose slightly, from 5.5 percent of all debt in 2001 to 5.8 percent of all debt in 2007.

This week, Sen. Sheldon Whitehouse, D-R.I., chaired a Senate Judiciary subcommittee hearing on his bill to carve out an exception for people whose medical bills were the main cause of their financial distress.

Full Story: Change bankruptcy laws to help address medical financial stress

The possibility of bankruptcy can have a big impact on an IRS compromise. The suggestion of the possibility of bankruptcy can act as leverage. It will reduce the value to the IRS of an offer in compromise.

When you file bankruptcy it can discharge your tax liabilities. Any taxes that could be discharged by a potential bankruptcy cannot be collected against the future income of the taxpayer. A critical component of an offer in compromise is an IRS calculation of how much can be collected from future income. If bankruptcy is “Plan B” to an offer in compromise, the IRS may reduce the value of future income to account for the limited collection potential.

Want to know more about Offer in Compromise(OIC)?

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General Motors Corp.’s plan to slash its dealer network by the end of 2010 may accelerate, matching the pace set by Chrysler LLC, in a bankruptcy the biggest U.S. automaker says is probable.

GM began telling 1,100 U.S. dealers yesterday their franchise agreements wouldn’t be renewed, meaning they would stop selling cars in about a year. A day earlier, Chrysler informed 789 U.S. dealers they’d stop selling cars by June 9.

A Chapter 11 filing would help GM shed franchise accords that would otherwise be binding. Using the courts to hasten dealer consolidation would help meet the goal of a “speedy” bankruptcy as outlined by Chief Executive Officer Fritz Henderson in a May 14 Bloomberg Television interview.

“If GM files bankruptcy, the landscape will change to reflect what Chrysler is doing with its dealer body,” said Billy Donley, a franchise and distribution attorney for Baker & Hostetler LLP in Houston.

The shutdowns are GM’s first step to pare domestic dealers to a range of 3,600 to 4,000 from 5,969 by the end of 2010. Having fewer retailers may allow the survivors to sell more cars at higher prices, boosting profit.

“It’s a cruel day, but it’s one of the casualties of the situation,” said Mike Robinet, a CSM Worldwide Inc. analyst in Northville, Michigan. “Dealer consolidation is a fairly substantial reason that Chrysler had to go into bankruptcy and a very good reason why GM will need to go in as well.”

GM’s Letter

GM told dealers in a letter the locations targeted for closing were measured by benchmarks including sales volume, customer feedback, capitalization, profitability and pairings with competing brands.

The notices went to “1,100 underperforming and very small sales-volume U.S. dealers,” GM said in a statement.
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All recent indications are that the IRS is plowing ahead in its collection efforts under a weakening economy.  Revenue Officers continue to push hard, and there are no signs that Automated Collection Service has backed off its levy and lien filings.

The unfortunate result of this pressure is that more and more clients are turning to a tax bankruptcy to resolve IRS problems.  The advantages of a tax bankruptcy are often significant.  Here are a few:

1.     Bankruptcy stops the IRS and releases levies and seizures.

A tax bankruptcy immediately secures the release of an IRS levy on bank accounts and wages, and stops seizures of assets like houses, cars and business equipment.  This is absolute under bankruptcy law - once bankruptcy is filed, all collection actions must stop, including those of the IRS (this is referred to as a “stay”).  In most cases, bankruptcy frees property from the IRS the same day it is filed.

2.     Bankruptcy ends IRS discretion in its case handling.

Once bankruptcy is chosen, it is no longer just up to the IRS.  IRS personalities and procedures yield to bankruptcy law.  Installment agreements that could not be agreed to under IRS standards may be obtained in a Chapter 13 repayment plan.  Chapter 13 adds the benefit of stopping the accruals of interest and penalties while payments are made, a virtual impossibility with direct IRS negotiations.  Taxes that could not be solved by an administrative IRS offer in compromise can be eliminated in a Chapter 7.

3.     Bankruptcy eliminates taxes, interest and penalties.

Income taxes owed on returns that were actually filed with the IRS more than 2 years before the bankruptcy and were due to be filed with the IRS more than 3 years before the bankruptcy can be wiped out in a Chapter 7.  Bankruptcy is a powerful means of IRS resolution on these older income taxes.  If the bankruptcy rules are met, all the taxes, interest and penalties will be gone after a Chapter 7 bankruptcy is completed (usually 4-6 months).

4.     Bankruptcy is an alternative to an offer in compromise.

The IRS is accepting only 25% of compromises.  The IRS offer in compromise program has historically been an good source for resolving unpaid taxes.  With the current low acceptance rate, the reality is the IRS offer program is now broken.  Because of that, filing a tax bankruptcy on the government has become a viable option for a fresh start with the IRS.

5.     Bankruptcy is a complete solution to all debt problems.

A tax bankruptcy solves IRS problems, but it also can eliminate state taxes, overwhelming credit card debt, well-intentioned medical bills, debt from a failed business - and it stops foreclosures.  With the present state of the economy, a comprehensive “all in one” solution to financial problems can take priority.

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