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Dealing with tax debt: bankruptcy is not the only option

Tax debt can become unmanageable. When that happens, it doesn't matter how talented someone is in their chosen profession. The overriding need is for a debt relief strategy.

A recent celebrity case in point in California is Dionne Warwick. Warwick, who is 72, was one of the most popular singers of the 1960s. But now she is burdened by personal tax debt and has made the decision to seek bankruptcy protection. She filed for Chapter 7 bankruptcy last week.

The debts described in the bankruptcy filing are daunting. It starts with $7 million in debt to the IRS for federal taxes. But Warwick also owes more than $3 million in California franchise taxes.

That adds up to more than $10 million in tax debt. It dates back to 1991, with interest and penalties accruing along the way.

Warwick's publicist told the news media that the singer has made several attempts to work out payment plans with the IRS and the California Franchise Tax Board. It is not clear why those efforts were unsuccessful.

After all, there are procedures such as an offer in compromise (OIC) that are designed to enable a taxpayer to resolve tax debt issues with the IRS without a bankruptcy filing. The OIC can be a way for a taxpayer to settle a tax debt with the IRS for less than he or she owes. Similarly, it may be possible to negotiate an installment payment plan to take care of tax debt.

In Dionne Warwick's case, however, it seems that her financial problems went far beyond her tax debt. Her financial affairs were apparently badly mismanaged, especially in the late 1980s and early 1990s.

Source: "Dionne Warwick, down to $1,000 cash, files for bankruptcy," CNN, Alan Duke, 3-27-13

To learn more about our practice, please visit our page on the offer in compromise.

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