Bankruptcy and IRS Tax Debt Scenario
In my days as a Revenue Officer, I knew someone that had a tax debt of $60,000 before bankruptcy. They tried 6 different bankruptcies in a 10-year period, all in the effort of outlasting the statute on their tax debt. But when all was said and done, the debt was $200,000 and their statute was extended. How could this be?Quick Facts about Bankruptcy and your IRS Debt
Can Tax Debt be Discharged for Good with Bankruptcy? Sometimes Tax Debt can be discharged through bankruptcy. But three rules have to be met.
- Filing Bankruptcy will stop the IRS from filing a Tax Lien or using any collection actions against you. You will not receive a notice from the IRS.
- If a Tax Lien is already in place, there's no getting rid of it until the debt is paid in full.
- BUT, the penalties and interest are still accruing in the background, making your Tax Debt climb to shocking new heights.
- Bankruptcy extends the amount of time the IRS has to collect on your debt (Statute of Limitations). For example, if your file a Ch. 13 Bankruptcy, you are extending your IRS Statues by 5 years!
- After Bankruptcy your IRS tax debt still stands, and it's larger than ever. You may have been paying a "pennies on the dollar" amount for a while, but it's not higher than the IRS interest rate.
1. The tax year must be at least 3 years old.
2. You must have personally filed the Tax Return. If the IRS filed a Substitute for Return (SFR), you CANNOT discharge the debt for that tax year.
3. This last one is killer, it gets most taxpayers. The Tax Return has to be filed AND accessed more than 24 months prior to filing for bankruptcy. This means the tax return was filed and processed and you were billed 24 months prior to the bankruptcy petition date. Basically, you can't file back taxes right before your file for bankruptcy in and effort to cover those tax years.
I'm in Bankruptcy now and need to Resolve my Tax Debt, Now what? It's hard to work with the Bankruptcy AND IRS authorities to resolve your Tax Debt. I've seen experienced attorneys jump through flaming hoops to work on negotiations. If you're in Bankruptcy now and need to resolve your Tax Debt, you're going to need professional help!
What Can I do?
If you pass the tests above, you might qualify for having your tax debt eliminated for good. But most people will not. If you don't want to wake up to a tax debt nightmare months or years down the line, face your debt and find a solution that doesn't involve bankruptcy.