Dealing with serious tax debt is overwhelming. Whether you owe the IRS a few thousand dollars or face six-figure balances, you may feel trapped between two major options: pursuing tax resolution or filing for bankruptcy. Both paths can offer relief, but they work very differently, and one could make a lot more sense for your situation than the other.
Understanding each option’s pros, cons, and long-term impact is critical before you decide.
Before moving forward, let’s explore the key differences, common misconceptions, and what to consider.
What is Tax Resolution?
Tax resolution is an umbrella term for working directly with the IRS (or state tax agencies) to address and settle your outstanding tax debt without bankruptcy. It usually involves negotiating payment terms, reducing penalties, or settling for less than the full amount owed under specific programs.
Common tax resolution options include:
Key takeaway: Tax resolution is about negotiation and cooperation with the IRS to solve the problem without wiping the slate clean through court proceedings.
What About Bankruptcy?
Bankruptcy is a legal proceeding in which individuals or businesses who cannot pay their debts seek relief through the federal courts. When it comes to tax debts, bankruptcy can offer powerful solutions—but it’s not a silver bullet.
There are two main types of personal bankruptcy:
Tax debts can only be discharged in bankruptcy if:
If your tax debts don’t meet these requirements, bankruptcy might not wipe them out, and you could still owe after the bankruptcy closes.
Comparing Tax Resolution and Bankruptcy
Let’s break it down side-by-side:
| Factor | Tax Resolution | Bankruptcy |
| Goal | Negotiate directly with the IRS for manageable terms | Discharge or restructure debts through the court |
| Credit Impact | Minimal (collections reported, but no bankruptcy filing) | Severe (Chapter 7 remains on your credit for up to 10 years) |
| Flexibility | Customized plans based on your financial situation | Structured by court rules; less negotiation |
| Cost | Varies (could be lower overall) | Filing fees + attorney fees can add up to several thousand dollars |
| Eligibility | Open to most taxpayers | Strict requirements for discharging taxes |
| Asset Protection | Protect assets like the home and savings through negotiation | Risk losing non-exempt assets in Chapter 7 |
| Time to Resolution | 6 months to 2 years typically | 3–6 months (Chapter 7) or 3–5 years (Chapter 13) |
Real-Life Scenarios
Scenario 1: Tax Resolution Success
After several rough years as a self-employed graphic designer, Maria owed the IRS $48,000. After applying for an Offer in Compromise, she settled her balance for $6,500 because she demonstrated that paying in full would cause extreme hardship. She kept her business, avoided bankruptcy, and rebuilt her credit over time.
Scenario 2: Bankruptcy as a Lifeline
David and Kim, a married couple, owed $85,000 in combined debts, including $15,000 in older IRS taxes. They also had $40,000 in credit card debt and $30,000 in medical bills. Bankruptcy allowed them to eliminate most of their debts, including the qualifying tax debt, and start fresh within a year.
Common Misconceptions
🚫 “If I file for bankruptcy, all my taxes will go away.”
Not true. Many taxes (especially recent ones) survive bankruptcy. It’s critical to understand which debts are dischargeable before filing.
🚫 “The IRS won’t negotiate, so bankruptcy is my only option.”
Wrong again. The IRS prefers installment agreements and settlements, and they have programs specifically designed to resolve tax debt without forcing you into bankruptcy.
🚫 “Bankruptcy is easier than dealing with the IRS.”
Maybe for some, but bankruptcy brings its own challenges — including court oversight, strict repayment plans, credit damage, and public disclosure.
How to Choose the Right Path
Ask yourself:
Tax resolution is often a better first choice if your debt is mostly tax-related and you’re willing to work with the IRS. If your overall debt burden is crushing and tax debt is just one piece of the puzzle, bankruptcy could make more sense — but only after careful evaluation.
When running a business, hiring workers provides the flexibility to grow and adapt to changing needs. However, how you classify those workers—as employees or independent contractors—matters a great deal. Misclassification is not just a technical mistake; it can lead to significant financial penalties, legal troubles, and reputational harm.
What Is Worker Misclassification?
Worker misclassification occurs when a business treats an employee as an independent contractor, intentionally or by mistake. While independent contractors are self-employed and handle their own taxes, employees are subject to payroll tax withholding, workers’ compensation coverage, unemployment insurance, and labor law protections.
The IRS, Department of Labor, and many state agencies closely monitor worker classification because it impacts tax collection and worker rights. Misclassifying employees allows businesses to avoid employment taxes and benefits obligations, but the risk far outweighs the short-term savings.
The Consequences of Misclassification
How to Properly Classify Workers
The IRS uses a three-factor test to determine a worker’s status:
No single factor is decisive. It’s important to look at the entire relationship and consider the degree of control and independence.
Protecting Your Business
To avoid misclassification problems:
Misclassification might seem like a minor administrative issue, but the consequences can be severe. Taking the time to classify workers correctly not only protects your business but also ensures you treat your team fairly and legally.
Understanding the IRS Trust Fund Recovery Penalty (TFRP): What Business Owners Need to Know
By Tax Solutions USA | taxsolutionsatx.com
When running a business, managing payroll taxes is one of the most important and often misunderstood responsibilities. If your business fails to pay employment taxes withheld from employees’ wages, the IRS doesn’t just hold the business accountable—it can also hold individuals personally liable through what’s called the Trust Fund Recovery Penalty (TFRP).
The TFRP is a serious penalty the IRS can impose on any person who is responsible for collecting or paying withheld employment taxes, but willfully fails to do so. These “trust fund taxes” include:
The government considers this money held “in trust” for the U.S. Treasury. Using these funds for business expenses instead of remitting them is a violation that can result in hefty penalties.
The IRS looks beyond job titles. Responsibility is determined by a person’s duty and control over business finances, not their position.
You may be held liable if you:
Multiple people can be assessed the penalty, and each is potentially liable for the full amount of unpaid trust fund taxes.
To be assessed the TFRP, the IRS must prove you willfully failed to pay the taxes. This doesn’t necessarily mean you intended to defraud the government. It could mean:
Even a good-faith attempt to keep the business afloat won’t shield someone from the penalty if trust fund taxes were knowingly left unpaid.
The TFRP equals 100% of the unpaid trust fund taxes—this includes both the income tax withheld from employees and the employees’ portion of FICA. It does not include the employer’s share of Social Security or Medicare.
The TFRP can be devastating—especially if you’re personally on the hook for your business’s tax issues. But knowledge is power. If you suspect trust fund taxes haven’t been paid, or you’ve received a notice from the IRS, it’s crucial to act quickly.
At Tax Solutions USA, we help business owners and responsible individuals understand their rights and options when facing the TFRP. If you’re dealing with IRS payroll tax issues, contact us at taxsolutionsatx.com to schedule a telephone consultation.
Three primary penalties apply when a taxpayer does not:
These apply to income, gift, and estate tax returns, among others.
Case Insight:
Estate of Skeba—a penalty was abated despite a late filing because the estate had reasonable cause and no balance due by the extended deadline.
Factors for Relief:
The VCSP is an IRS program that allows businesses to voluntarily reclassify workers as employees for future tax periods, offering partial relief from past federal employment taxes.
To qualify, the taxpayer must:
Note: If any member of an affiliated group is under employment tax audit, the whole group is ineligible. Prior audits are allowed only if the taxpayer complied with the outcome and isn’t currently disputing the classification in court.
Participants must:
Only the taxpayer may sign Form 8952, though a representative with a valid POA (Form 2848) may be listed. Full payment must accompany the signed closing agreement.
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Selling Property at a Loss: Related-Party Rules
If you’re considering selling property at a loss, be aware of IRS rules restricting loss deductions in transactions between certain related parties.
In the past, some taxpayers created fake sales between relatives or entities they controlled to generate tax-deductible losses. To prevent this abuse, Congress established a blanket rule: you cannot deduct a loss on the sale or exchange of property between related parties—regardless of whether the sale was legitimate, voluntary or involuntary, or direct or indirect.
The IRS defines related parties to include:
If a loss isn’t deductible under these rules, and the related party who bought the property later sells it at a gain, only the portion of the gain above the original nondeductible loss is taxable.
TRUST FUND RECOVER PENALTY (100% PENALTY)
Sometimes, when businesses get in financial trouble, they are tempted to pay creditors or others instead of paying the government the income and employment taxes it has withheld from employees’ wages. This is a big mistake and can lead to large penalties against business owners or others who are responsible for paying over such taxes. In such situations, the IRS can levy on the individual assets of the responsible person.
To encourage prompt payment of withheld income and employment taxes, including social security taxes, railroad retirement taxes, or collected excise taxes, Congress passed a law that provides for a trust fund recovery penalty (TFRP). Income and employment taxes are called trust fund taxes because you hold the employee’s money in trust until you make a federal tax deposit in that amount. The TFRP may apply to you if these unpaid trust fund taxes cannot be immediately collected from the business.
The penalty is equal to the unpaid balance of the trust fund tax. It is computed based on the unpaid income taxes withheld, plus the employee’s portion of the withheld FICA taxes. The penalty for collected taxes is based on the unpaid amount of collected excise taxes.
The TFRP may be assessed against any person responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and willfully fails to collect or pay them.
For purposes of the TFRP, a responsible person includes, but is not limited to, an officer or employee of a corporation, a partner or employee of a partnership, a member or employee of an LLC, a corporate director or shareholder, another corporation, or a surety or lender.
The IRS does not need to use the TFRP to assert liability against the sole proprietorship owner because the individual owner is already personally liable for trust fund taxes. However, the IRS can use the TFRP to assert liability against an employee or non-owner exercising control over a sole proprietorship’s finances.
Regardless of a person’s corporate title, a person will not be held liable for the TFRP unless he or she is considered a “responsible person” (i.e., an individual who has the duty to account for, collect, and pay over the trust fund taxes to the government). There may be more than one responsible person in a business.
Most trust fund recovery cases involve corporate officers. A director who is not an officer or employee of the corporation may be responsible for the trust fund recovery penalty if he or she was responsible for the corporation’s failure to pay due and owing taxes.
Income in Respect of a Decedent (IRD)
When a taxpayer dies, certain income they were entitled to but had not yet received is known as Income in Respect of a Decedent (IRD). Due to accounting rules, this income isn’t reported on the decedent’s final tax return but is still taxable.
Either can claim certain unpaid deductible expenses at the time of death:
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Transfers of Property Incident to Divorce
In general, no gain or loss is recognized when property is transferred between spouses or between former spouses if the transfer is incident to divorce. When this nonrecognition rule applies, the receiving spouse (transferee) is treated as acquiring the property by gift. As a result, the transferee’s basis in the property is the same as the transferor’s adjusted basis at the time of transfer.
A transfer is considered “incident to divorce” if:
Exceptions to the Nonrecognition Rule:
Stock Redemptions in Divorce: The tax treatment of a stock redemption depends on whether the receiving spouse is considered, under tax law, to have received a constructive distribution when the other spouse receives property for the redeemed stock. This can happen, for example, when the transferee spouse is under a binding obligation to buy the shares.
Two scenarios apply:
Binding Agreements Override Tax Law Treatment:
If a divorce or separation agreement (or any other valid written agreement between the spouses) explicitly states how the redemption should be treated, that stated intent controls:
1. Joint Tax Returns for Married Couples
Under IRC §6013, married couples may file joint federal income tax returns.
Marital status is generally determined by state law where the couple resides.
2. Defense of Marriage Act (DOMA)
DOMA (1996) defined “marriage” and “spouse” as relationships between men and women for federal purposes.
Section 3 of DOMA was struck down by the Supreme Court in U.S. v. Windsor (2013), allowing federal recognition of same-sex marriages if legal under state law.
3. IRS Ruling Post-Windsor (Rev. Rul. 2013-17)
IRS recognizes same-sex marriages for federal tax purposes, regardless of where the couple lives.
This includes:
Joint filing
Estate tax marital deduction
Tax-free employer health benefits
Other federal tax benefits
Exclusions: Domestic partnerships, civil unions, or similar relationships not legally defined as “marriage” are not recognized as “marriage” for tax purposes.
Effective date: Prospective from September 16, 2013, but can be applied retroactively under certain conditions (e.g., refunds or amended returns).
4. Obergefell v. Hodges (2015)
The Supreme Court held that all states must recognize same-sex marriages, effectively legalizing them nationwide.
5. IRS Regulations (2016)
Issued Reg. §301.7701-18, codifying Windsor and Obergefell rulings:
A marriage is valid for federal tax purposes if it is legal where it was performed.
Same-sex marriages performed abroad are valid if recognized by any U.S. state.
Domestic partnerships/civil unions are still excluded.
6. Earlier Court Decisions (Pre-Windsor)
Meuller v. Comm’r (2002) and Merrill v. Comm’r (2009) denied same-sex couples joint filing status because they were not legally married under their state laws at the time.
Gill v. OPM (2010) found Section 3 of DOMA unconstitutional under Equal Protection, reinforcing Windsor.