I did short sales this year and will have a much larger tax bill I cannot pay next year from the forgiven debt. Should I liquidate my IRA to pay off my remaining unsecured debt this year then make an OIC next year? I have never been late in mortgage or tax payments.
NO. No, no.
Step back and reflect on your overall financial situation, which is difficult for all of us on this side of the computer based on a summary. However, please allow me to point out that IRA funds are for the most part exempt in a bankruptcy. The unsecured debt is discharged in a chapter 7 bankruptcy if you qualify.
I have actually had people come to my office after they drained their 401K, IRA or other such funds to pay unsecured credit card debt, cry when they learned that draining such funds could have been prevented. Especially when they saw that the credit card companies refuse to negotiate, but instead, simplly pile on what used to be illegal interest rates, as well as charges, fees and other add - ons.
I would urge you to at the very least obtain a consultation with an experienced bankruptcy attorney in your jurisdiction before you even think about withdrawing even a penny from the IRA.
If you qualify, a chapter 7 bankruptcy would likely be the best way to give you a fresh start, financially.
My office represents consumer debtors in chapter 7 and chapter 13 bankruptcies in Massachusetts and New Hampshire. However, the U.S. Bankruptcy Code is federal law.
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Mr Andrews is right on point here. Do NOT liquidate your IRA as it is exempt in most bankruptcy procedures. After all this is supposed to be your retirement money and it would be hard to replace this if you liquidate it. But get with a bankruptcy attorney immediately before doing something you will absulutely regret.
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No. You need to sit down with an accountant and look at your vulnerability on the short sale. Liquidation of an IRA will only impose larger liability. Additionally, if there is a tax liability the IRS will put you on payment plan while you assess your best option for resolving it. You have not provided enough information to determine if you qualify to get out of the tax liability. Talk to a CPA.
In addition to the above considerations and the possibility of bankruptcy, please consider the following:
If you were to pursue an OIC - which is an offer in compromise - with the IRS for any outstanding federal income tax liabilties, the act itself of liquidating an IRA to pay off unsecured debt instead of paying your federal income tax liabilities may be held against you. That is, the IRS may construe the IRA liquidation as the dissipation of an asset by you.
When an asset is viewed by the IRS as having been dissipated by a taxpayer seeking an offer in compromise, then you as the taxpayer are effectively treated by the IRS as still owning the asset in the evaluation of your finances. In such a situation, you are construed as having more equity on the balance sheet and more of an ability to repay the IRS debt. If this happens, it will worsen your chance at success for an offer in compromise (or at least result in an increase of the offer in compromise amount) based on doubt at to collectibility and/or ETA (effective tax administration) grounds. This, of course, assumes you meet the other criteria for a successful federal offer in compromise. Depending on the facts and circumstances of your situation, you may or may not otherwise qualify for an offer in compromise for the federal income tax liabilities. Whether to submit an offer in compromise application is a serious decision and needs to be analyzed on various levels before pursuing that course of action.
From your description, I assume you are a domiciliary and full time resident of Florida - a state which has no state income tax; therefore, if that is the case, you do not have to worry about Florida income tax since it doesn't exist.
Also note that if you are seriously considering submitting at some point a federal offer in compromise, please understand that the IRS will not entertain an offer in compromise while there is an open bankruptcy case. An offer in compromise to handle federal income tax problems should be done either before or after bankruptcy -- but not during.
Please speak to both a bankruptcy attorney and a tax attorney who is experienced with IRS problems, including offer in compromise and other collection alternatives.
Suzanne Alexandra Ascher, Esq., CPA, Tax LL.M.
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