You can add former baseball superstar Jose Canseco to the list of professional athletes who have filed bankruptcy. Major League Baseball’s 1988 Most Valuable Player and two-time World Series champion filed a Chapter 7 bankruptcy recently in Las Vegas, Nevada. He claims that he owes creditors $1.7 million, including half a million dollars to the IRS for personal taxes.
A Chapter 7 case is an “erase-your-debts-and-start-fresh” bankruptcy. During the bankruptcy case no creditor can collect from the debtor, including the IRS. Non-exempt property is taken and sold to pay creditors. Remaining debts are discharged, with certain exceptions like child support and alimony payments. Personal tax debts are very difficult to discharge in a Chapter 7 bankruptcy. The general rule on discharging tax liabilities is that the tax must be at least three years old and not based on fraud or evasion.
Canseco reportedly “forgot” to pay his taxes, which could mean that his tax debt is not dischargeable. Fortunately for Canseco, whatever tax debt remains after his Chapter 7 bankruptcy could become part of an IRS settlement. There are three types of IRS settlements:
Offer in Compromise
Canseco could offer to repay the IRS less than the amount owed. If accepted, the remaining debt is wiped clean. An offer in compromise is only successful when the IRS is convinced that offered amount is equal to or greater than the amount they could collect through forced collections without forcing you into financial hardship. Canseco’s Chapter 7 bankruptcy filing is terrific evidence in support of an offer in compromise.
Partial Payment Installment Agreement
A partial payment installment agreement allows the taxpayer to enter into an agreement with the IRS to pay back the taxes owed over a specified time. This amount can be less than the total amount initially owed to the IRS. This option is typically available to those individuals that cannot meet the minimum payment amount required with the normal installment agreement.
Penalty abatement allows the taxpayer to eliminate all or part of penalties owed. Penalty abatement does not eliminate any of the base amount of tax owed, just penalties added onto that initial amount. This is one of the easier ways to settle taxes owed for less.
If you owe back taxes and penalties, speak with an experienced attorney about your bankruptcy options. Bankruptcy can stop an IRS collection and potentially discharge the tax debt or penalties. Bankruptcy could also give you time to repay tax debts over three to five years.