Bankruptcy and IRS Debt – a Real Option
Sept. 3, 2017
The one we hear the most is that the bankruptcy code can't help you deal with IRS Debt. The truth is:
YOU CAN DISCHARGE IRS TAX AND PENALTY USING BANKRUPTCY… IF YOUR SITUATION IS RIGHT
The law does require that income tax and other non-trust fund type tax debt be discharged as a personal obligation if it meets certain date and other criteria.
The fact is that IRS debt is wiped away by the Bankruptcy Code all the time. We've helped our clients get rid of millions in tax debt via bankruptcy.
However, even if the tax debt meets the criteria for discharge in bankruptcy…it may not make sense for you to use it given your unique circumstances. It's important to have experienced counsel analyze your situation before proceeding.
WHAT ARE THE RULES FOR DISCHARGE OF IRS DEBT?
The rules are straightforward:
The tax debt must be non-trust fund tax debt. It has to be your tax debt, not trust fund taxes (payroll).
It has to meet date requirements. 3 years from the date the return was actually due, 2 years from the filing date, and 240 days from assessment.
There can't be fraud. If the return had fraudulent information in it, or lack of information, the IRS will argue after the fact that the debt wasn't discharged.
There can't be “willful evasion”. Hiding assets or spending money on a nice lifestyle instead of tax debt..may trigger this argument by the IRS as well.
EXCEPTIONS TO DATE RULES
Certain actions “toll” or suspend these time periods,
As a result, an ill-timed bankruptcy filing may not discharge the tax debt you thought it would.
These tolling events can be tricky to calculate and some of them aren't “settled” law. Get help from someone who understands this area of law.
OTHER BANKRUPTCY BENEFITS
BANKRUPTCY STOPS IRS COLLECTION AND FEDERAL TAX LIEN NOTICE FILINGS
If the IRS is trying to grab money or other assets, the bankruptcy filing stops it using the Automatic Stay under 11 U.S.C Sect. 362. The IRS can't take your wages, money in your accounts, start new collection actions or file a lien notice once the case is filed.
We like bankruptcy for this reason alone. It's a powerful way to put a stop to difficult collection problems and one that takes the decision making ability away from the IRS itself.
If you are filing the bankruptcy primarily for reasons unrelated to tax debt, this pause allows you to work out how you are going to deal with tax debt that will survive the case. The IRS can't start collection again until discharged is entered in a chapter 7, which usually occurs about 3-4 months after filing.
In a Chapter 13 bankruptcy, the automatic stay applies as well, but the tax debt is either paid off via your plan payments, treated as dischargeable at the end of the case and wiped away, or the debt survives the case if it is non-priority, unsecured, and non-dischargeable.
REMOVING AN EXISTING IRS LIEN USING BANKRUPTCY
If a chapter 13 bankruptcy is used, the lien filed prior to the bankruptcy is valued on the date of the bankruptcy filing and paid with some interest over the length of the plan. If the value of the lien is less than the total tax debt and the total tax debt is treated as dischargeable, than you may end up paying just a fraction of the debt in the plan, and getting rid of the remaining tax debt and the lien at the plan's conclusion.
Chapter 7 bankruptcy doesn't remove an IRS lien, but it can reduce the value of the lien to the net value of your assets. Unlike in a chapter 13 bankruptcy however, if the value of the asset increases after the chapter 7 filing and the lien is greater than the value (a good example is your home and it's equity)…the lien value will increase post filing.
Any assets that you buy or inherit post chapter 7 bankruptcy, won't be subject to the IRS lien if the underlying tax debt is discharged.
The IRS will often agree to release it's lien on the discharged debt after a chapter 7 bankruptcy if the assets are minimal or you offer some smaller amount to settle the lien.
IS BANKRUPTCY BETTER THAN DEALING WITH THE IRS DIRECTLY?
It can be. The answer to the question depends on all sorts of factors. Income, budget, assets, whether the IRS debt is dischargeable, IRS liens, other debt issues etc.
Most people don't qualify for an IRS offer in compromise and many have a difficult time in a payment plan because the IRS hasn't taken into account the full budget and other debt in determining ability to pay.
GET SOME HELP
If you have IRS debt, other debts like credit cards, medical bills, large car payments, or house arrears, it will be worth at least discussing whether bankruptcy might help. We've helped several hundred clients over more than 2 decades with serious tax debt use bankruptcy to make their situations better. Make an appointment and we can discuss whether bankruptcy might help you.