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Should I liquidate my IRA and pay off unsecured debt before making an Offer in Compliance to the IRS for tax due?

Vero Beach, FL |

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.

Attorney Answers 4


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.

CLICK HERE for "Should I File Bankruptcy, What do I Consider While Thinking About It"

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Thanks, but my unsecured debt is not enough to consider bankruptcy. It is next year's tax bill that will be a problem.


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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Mr. Fromm is licensed to practice law throughout the state of PA with offices in Philadelphia and Montgomery counties. He is authorized to handle IRS matters throughout the United States. His phone number is 215-735-2336 or his email address is , his website is and his blog is

LEGAL DISCLAIMER Mr. Fromm is licensed to practice law throughout the state of PA with offices in Philadelphia and Montgomery Counties. He is authorized to handle IRS matters throughout the United States. His phone number is 215-735-2336 or his email address is , his website is and his blog is <> Mr. Fromm is ethically required to state that the response herein is not legal advice and does not create an attorney/ client relationship. Also, there are no recognized legal specialties under Pennsylvania law. Any references to a trust, estate or tax lawyer refer only to the fact that Mr. Fromm limits his practice to these areas of the law. These responses are only in the form of legal education and are intended to only provide general information about the matter within the question. Oftentimes the question does not include significant and important facts and timelines that if known could significantly change the reply or make such reply unsuitable. Mr. Fromm strongly advises the questioner to confer with an attorney in their state in order to ensure proper advice is received. By using this site you understand and agree that there is no attorney client relationship or confidentiality between you and the attorney responding. This site should not be used as a substitute for competent legal advice from a licensed attorney that practices in the subject area in your jurisdiction, who is familiar with your specific facts and all of the circumstances and with whom you have an attorney client relationship. The law changes frequently and varies from jurisdiction to jurisdiction. The information and materials provided are general in nature, and may not apply to a specific factual or legal circumstance described in the question or omitted from the question. Circular 230 Disclaimer - Any information in this comment may not be used to eliminate or reduce penalties by the IRS or any other governmental agency.

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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.

This answer in no way creates an attorney-client relationship. The answer is not a complete answer and requires additional facts in order to provide the best options. The submitter accepts the risk of relying on such an incomplete answer and waives any claims of damages for doing so. As stated in the answer the submitter should contact a qualified bankruptcy attorney is discuss these issues further before any action is taken. Any action taken without advise and counsel of a qualified attorney is inadvisable.

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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.

All best,

Suzanne Alexandra Ascher, Esq., CPA, Tax LL.M.

Legal disclaimer by Suzanne Alexandra Ascher, Esq: My answer is strictly for information and education purposes only and therefore my answer does not form any attorney-client relationship and attorney-client privilege between me and you. These questions and answers on AVVO.COM are no substitute for actual qualified legal advice by an actual licensed attorney in good standing with the bar who can become fully informed of your entire situation above and beyond the limited description of your situation in your question. Further, nothing posted in this public forum of AVVO.COM is deemed confidential or privileged communication. Finally, in accordance with IRS Circular 230 disclosure, federal (United States) tax advice provided in this communication is neither intended nor written to be used, and cannot be used, by to avoid penalties under the Internal Revenue Code or to promote, market, or recommend to anyone a transaction or matter addressed in this communication.

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