It is not uncommon for those calling my law firm about their IRS tax debt to ask about Bankruptcy.
My law firm recently began offering bankruptcy services to residents of Northern California, this blog discusses the most common questions we receive about bankruptcy and tax debts—and their answers of course.
1. Will my tax debts be resolved by filing for bankruptcy?
Unfortunately, there is no straightforward answer to this first question, as it will depend on your unique financial situation. There are some basic parameters, but there are many exceptions to the general rule. You should always consult with a bankruptcy attorney to determine if your tax debs will be settled by filing bankruptcy.
If your IRS liabilities meet a strict set of conditions then they may qualify to be discharged through Chapter 7 bankruptcy. On the other hand, if you file for Chapter 7 and you have assets that are not exempt, they may be liquidated and the proceeds distributed to creditors. Since the IRS is considered a creditor, a court appointed trustee would examine any claim they might file and determine if it should be paid. If the tax debt is not dischargeable, you may still owe the balance of the tax debt even if they were paid in part.
If you file a Chapter 13 bankruptcy and you have tax debts that cannot be discharged in Chapter 7, you will be required to pay the taxes in full over a period of time up to 60 months, along with certain distributions to other creditors.
2. What are the qualifications to have my debts discharged?
In order to have unpaid tax debts discharged through Chapter 7 bankruptcy all of the following conditions must be met. If even one is not met, then the debts will remain after the proceedings have concluded.
- The debts must be related to a return that was last due at least three years prior to the bankruptcy filing. The limit also takes extensions into account; therefore if you requested a six-month extension on any of your returns it will add another six months to your wait time.
- The IRS assessed your tax debt at least 240 days before you begin proceedings.
- The tax debts must have resulted from unpaid income taxes. Other debts such as unpaid employer payroll taxes and trust fund recovery penalties cannot be discharged.
- The income tax debt cannot be the result of having filed a fraudulent return or from willfully attempting to evade or defeat the tax.
3. If my tax debts are discharged will it remove an IRS lien?
Again, this is going to depend on your unique financial situation. Generally having debts discharged through a Chapter 7 filing will prevent the IRS from pursuing any additional collection activities against you. However, it will not remove any previously recorded IRS tax liens on your property. You will need to pay the value of the lien in order to have it removed.
On the other hand, if your tax debts are settled through a Chapter 13 filing, then you can have the lien removed once you finish making payments to the IRS.
4. Is it true I need to have filed my tax returns in order to have IRS debts discharged?
Yes, as I mentioned above your tax returns need to be filed with the IRS in order to have the debt discharged by filing for Chapter 7 bankruptcy. If you never filed your own return, and the IRS filed a Substitute for Return on your behalf to assess the debt, then it will not be discharged. Then, after your proceedings conclude you will still have to find a solution to your tax debt problems.
5. If my tax debts are not discharged in bankruptcy, what other options do I have?
If your tax debts do not qualify to be discharged through Chapter 7 bankruptcy then you have a handful of additional options for settling the liabilities. The IRS offers tax settlement programs such as Installment Agreements, Offers in Compromise, or placement on the IRS’ Currently Not Collectible status. For more information on any of these programs you can read about them on my law firm’s website.