Bankruptcy is often used to deal with IRS tax liabilities. There are a lot of people who are unaware that taxes can be dealt with in bankruptcy. Federal tax liens, IRS wage garnishments, income taxes, and IRS levies can all be addressed with bankruptcy. In some cases, it’s possible to completely eliminate your past due personal income taxes in a Chapter 7 Bankruptcy. In other cases where taxes can’t be eliminated, you may be able to use Chapter 13 Bankruptcy to repay your taxes over 3 to 5 years. The Bankruptcy Court can be an excellent way to sort out any disputes on amounts owed to the IRS and depending of the situation the potential may exist to reduce interest and penalties. The bottom line is that filing for bankruptcy can be an option to deal with IRS Tax liability.
If you owe taxes, you may consider filing for bankruptcy to get rid of the debt, or to deal with your tax problems through bankruptcy reorganization. Many taxes can be discharged in a bankruptcy proceeding depending on what type of taxes they are as well as when the taxes came due. A number of people as well as some tax professionals are under the wrong impression that Federal income tax liabilities are not dischargeable in bankruptcy. That presumption is wrong. While the rules on discharging taxes in bankruptcy can be quite complicated, filing for bankruptcy may be an excellent way to stop the IRS from collection actions, wage garnishments, levies on bank accounts, and liens on property.
Taxes and Bankruptcy often involve many complicated questions of law. Whether or not you can get rid of your taxes in bankruptcy depends on the facts of your particular situation. The law provides that certain taxes are dischargeable under specific conditions. In order to determine whether you can discharge taxes in a bankruptcy, requires an understanding of different areas of law, which includes the United States Bankruptcy Code, the Internal Revenue Code or “Federal Tax Code”, as well as State law as it relates to bankruptcy exemptions. Volumes of books have been written on Taxes and Bankruptcy, so as you might imagine, the laws, rules, and regulations regarding taxes and bankruptcy are too complicated to thoroughly explain here. There are some generalities which apply in most situations involving taxes and bankruptcy, but every situation is different, and should be evaluated on a case by case basis by an experienced Bankruptcy Lawyer.
When a person files for bankruptcy and has tax liability to the IRS or any other taxing authority, the filing of the bankruptcy case automatically stops or “stays” all collection actions on those taxes. Filing for bankruptcy will stop IRS collection actions, including, IRS seizures of property, IRS wage garnishments, IRS bank account levies, Federal Tax Liens, and lawsuits in Tax Court proceedings. The automatic stay will stop any of the legal actions by the IRS and bring the issues into the forum of the Bankruptcy Court. Filing bankruptcy when you owe taxes can enable you to get rid of the tax liability by obtaining a bankruptcy discharge or to reorganize your tax liabilities utilizing a bankruptcy repayment plan.
In order to discharge taxes in bankruptcy, the income tax liability must meet the following conditions.
1. A tax return must have actually been filed for the delinquent tax liability owed;
2. At least 240 days have passed since the IRS assessed and determined what you owe;
3. The taxes must have been filed two years before you file a bankruptcy petition; and
4. The taxes must have been due at least 3 years before the filing of the bankruptcy petition. Or in other words, they became due three years prior to filing your bankruptcy.
Whether personal income tax liability can be discharged is mainly based on certain timeframes, or the lapse of specific timeframes from a tax return’s due date, the specific filing date of the return, the actual assessment date of the tax, and then to the date of the bankruptcy filing. This may seem a bit complicated but discharging personal income tax liability in bankruptcy usually comes down to timeframes.
If you are aware of any of the above dates and believe your personal income taxes are dischargeable in a bankruptcy, it’s always a good idea to obtain a copy of your IRS transcripts just to be certain. You can get a copy of your tax transcripts directly from the Internal Revenue Service.
Even in situations where you meet with the timeframes above, other criteria may prevent you from getting rid of your taxes in a bankruptcy. You first need to make sure you are eligible for bankruptcy and meet the conditions of the bankruptcy means test. If you have determined that you qualify for Chapter 7 or Chapter 13, your income tax liability still might not be dischargeable in bankruptcy if the Internal Revenue Service can prove you willfully tried to evade the tax or fraudulently filed your tax return. Tax fraud, hiding assets, and tax evasion can make income tax liability non-dischargeable.
The latest changes to the bankruptcy laws in 2005 imposed some limits to a taxpayer's ability to discharge certain taxes in Chapter 13 Bankruptcy repayment plan. Anyone facing tax problems should consult an attorney that is experienced in bankruptcy and non-bankruptcy options to determine the available options to address your tax debts. Whether you’re interested in a Chapter 7, a Chapter 13, or if bankruptcy is not an option to address your tax liability, an experienced bankruptcy attorney may be able to help you address your tax problems and even offer tax resolution services outside of bankruptcy.
Copyright: Copyright © 2008 RJ Atkinson LLP – Attorneys At Law
About the Author:
Rogena Jan Atkinson of The Law Offices of RJ Atkinson,LLP, (rjabankruptcy.com) is a bankruptcy lawyer & foreclosure attorney who has stopped thousands of foreclosures with bankruptcy. Visit
www.rjabankruptcy.com to learn more about foreclosure and bankruptcy.