IRS and Bankruptcy

Posted 6 months ago. Applies to United States, 2 helpful votes

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BASIC RULES

The tax must be 3 years old when due. Generally the due date is April 15th. However, if April 15th falls on a Saturday or Sunday the due date will be the 16th or 17th. (2) The tax return must be filed more than 2 years before the date on which you file the Bankruptcy. (3) If the IRS has assessed your taxes, it must have been done more than 240 days before the filing. (4) You have to file your income tax returns. At times, the IRS files returns when an individual has failed to file. IRS filed tax liability is not dischargeable. (5) The filing must be an honest filing. Fraudulent tax returns do not create dischargeable taxes. Neither does a willful attempt to evade taxes. (6) There has not been a "tolling." Written agreement with the IRS and a prior filing in Bankruptcy can toll the above time period to make otherwise dischargeable taxes into non dischargeable taxes. When I explain the above mentioned rules to clients they frequently look at me glassy-eyed. I don't blame them because the rules are legalistic and confusing. Let's say the date you are meeting with your lawyer is April 16, 2014. You owe $12,000 for your 2010 taxes. Issues to be determined are: Did you file the taxes on time? Or were they filed late? Or was there an extension request filed? To determine dischargeability, follow the steps above. You filed your taxes for 2010 roughly on time in 2011. The tax due is more than 3 years old and you filed the return more than 2 years ago. The IRS never filed an assessment. And, of course, you filed honestly, maybe through a tax preparer. You have never entered into a written and signed "offer and compromise" or other agreement. Since neither April 15, 2010 nor April 15, 2014 falls on a Saturday or Sunday, you can file a Chapter 7 and be able to discharge this debt, including any interest and penalties that have been added on to the original $12,000. Alternatively, you can file a Chapter 13 and pay the IRS debt for 2010 at a possible low dividend, let's say 10% of the amount due.

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INCOME TAX LIENS

When the IRS has filed a lien, you have a serious problem. The debt is extinguished but the lien remains. As to personal property that generally does not pose a problem, but it does if you own a home. IRS liens have a life of 10 years and can be renewed.

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IRS IN A CHAPTER 13

IRS liens can often be avoided in whole or in part. If the market value of the home is $100,000 and the mortgage(s) and real estate tax are more than $100,000 the lien can be avoided. Assume a tax lien of $50,000 and the mortgage(s) and real estate tax total $90,000: a Chapter 13 can be structured to repay $10,000 of the tax lien in full and the remaining $40,000 as a general unsecured creditor repaying a very low dividend. Another advantage to a Chapter 13 is when there are non-dischargeable tax debts and/or tax liens that cannot be avoided: you can repay the IRS debts over a period of up to 5 years.

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What you should have prior to seeing an Attorney to get help

When you are considering dealing with personal income tax debts through a Bankruptcy you should consult with an experienced lawyer who concentrates in Consumer Bankruptcy. Bring as many documents from the IRS as possible. If possible you can obtain your Master File printout from the IRS

Additional Resources

IRS on bankruptcy. http://www.irs.gov/publications/p908/

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