I recently wrote a post about the rules that govern whether taxes can be discharged in bankruptcy. Today, I would like to focus on related question: should I file bankruptcy? My general advice is, “if the taxes are the only thing that you are behind on, then there are some options other than bankruptcy that you should consider.” However, sometimes bankruptcy is the only way out.

There are some things you should keep in mind about how filing bankruptcy affects your tax situation. First, when you file bankruptcy, your “account” at the IRS is frozen. A stay is placed on everything so the IRS cannot collect from you in any way or send notices to you. This is good. But the collection process is not the only thing that is halted. The clock that is counting down the statute of limitations is also running. If you are filing bankruptcy and the taxes are going to be discharged, then this isn’t a problem. However, an offer in compromise or the filing of a Collection Due Process hearing request also freezes your account.

This can be a problem. If the time has not elapsed for the taxes to be discharged in bankruptcy and you stop the clock, then you essentially take that threat away from the IRS in accepting the offer in compromise or the taxpayer is going to file bankruptcy and you won’t get a dime.

I guess the moral of the story is, before you file anything that is going to stop the statute of limitations from running you need to consider the big picture and take care of all aspects of your case. While it used to be malpractice not to file a Collection Due Process request, today it may very well be malpractice to file one.