Student Loan Creditors: Appreciate Your IRS Tax Collector

While we often knock the practices of the IRS, this article discuss three ways in which the IRS is vastly less barbaric, and dare I say, even reasonable, when it comes to the settlement of past taxes as compared to say, the vampires of student debt industry.


1. The IRS has a limited time to collect on a tax debt

The IRS has just 10 years to collect on a debt. Of course, there are some limitations:


  • The 10 years doesn't start running until you actually file a tax return (or the IRS files one for you through the Substitute Filed Return process)
  • Filing an timely collection due process appeal, tax court petition, bankruptcy (whether affecting the taxes or not)  or offer in compromise will stop the 10 year period from running
  • If you leave the country, the 10 year time period does not run.
  • If you get all jerky with the IRS they can sue you on the debt and convert it into a civil judgment, and then that changes things. This is usually done when someone is taking steps to hide assets they owe to the IRS. It is fairly rare.


So as bad as it is, it will (eventually) go away. Not so with student loans. You will have your student loans until you die.


 2. The IRS will settle taxes based on your current income, assets, and short-term financial prospects.

The IRS routinely accepts Offers in Compromises based on a realistic amount of money they can collect in the remaining 10 year period  I discuss above. Right now, we are seeeing some very favroable results. The IRS offer in compromise division certainly got the memo that these economic conditions are the worst since the great depression and are settling taxes accordingly.


Compare this with the Student Loan Collectors. The only possible deal you'll get is a full or partial deferment. As your student loan debt is likely just getting bigger and bigger — only creating an even bigger monster that is less likely to ever go away.


3. If things go really bad, you can file bankrupt to discharge your tax debt.

Yes, you can file Chapter 7 bankruptcy to discharge old income tax debts. I've had CPAs and IRS agents tell me I am wrong. But trust me, Chapter 7 bankruptcy can do the trick after everything else failed. Of course there are some limitations; it has to be an older tax year. Don't think you can run up a big debt this year and discharge it next. The IRS wants to make sure that you aren't gaming the system. If they think you are they will fight you tooth and nail on a discharge. The IRS will grant a discharge if they thing you merit it. There are some exceptions:


  • Payroll "trust fund" taxes — not dischargeable in bankruptcy. Which makes sense, as the trust fund taxes are really money that belonged to employees that an employer never forwarded to the IRS, so it is like embezzlement.
  • Case of tax protestors or tax defiers. One of my tragically hokey youtube videos got  the attention of the tax protestor groups, and I perhaps chummed the waters bit on an article I just wrote on how the tax code violates the 13th Amendment. Look, these are all fascinating arguments. And you may very well be morally right. However, if you make a big deal that the reason why you are not complying with the tax code is because it is illegal, only applies to dividend or whatever, you will forever screw yourself out of filing bankruptcy to discharge the tax debt you will surely incur.


Now compare this with student loan debts. Only in very few instances is student loan debt dischargeable. For instance, when the loan was unlikely to be ever paid back as the student was not qualified for the career the education was supposed to prepare them for; that is the school allowed someone to enroll who had no business enrolling.


Isn't time to stop this barbarism?

Someone needs to explain to me why someone who works hard at school and incurs  higher and higher debt, in this education debt trap, encouraged to do so by  their parents, their high school, society-at-law, has a moral defect that should preclude them from receiving the same remedy and benefit someone who got behind on their tax bill would get. Why is it that the country is fine with making permanent paupers out the next generation of workers, simply because they were too idealistic to disregard an absurd maxim: education is always worth the cost?


The fix to this problem is simple. Once again allow student loan borrowers the ability to get a fresh start via bankruptcy or even an extra judicial parallel student debt negotiation plan similar the IRS very successful offer in compromise program.