If you have IRS debt, you may be considering bankruptcy to address it.
Find out if bankruptcy will help clear IRS debt.
What is IRS Debt?
Federal tax debt refers to the amount of money owed to the Internal Revenue Service (IRS) by an individual or a business entity. It is a result of failing to pay required federal taxes or filing tax returns inadequately or not at all. Unpaid taxes can accumulate over time due to various reasons, such as financial hardship, incorrect tax calculations, or simply neglecting one’s obligations.
Self-employment tax applies to individuals who work for themselves and must cover both the employer and employee portions of Social Security and Medicare taxes. Those who are self-employed are required to pay quarterly payments to the IRS, and if this is not done, tax debt accumulates.
How Can I Discharge IRS Tax Debt?
There are two types of bankruptcy that individuals can file: Chapter 7 and Chapter 13. Both have different eligibility criteria and rules surrounding the discharge of tax debt. [1]
Chapter 7 bankruptcy, also known as liquidation bankruptcy, allows individuals to eliminate most of their unsecured debt, including certain tax debts. To qualify for tax debt discharge under Chapter 7, one must meet the following requirements:
- The tax debt must be at least three years old:
The tax return must have been filed at least three years before the bankruptcy petition. Ensure that all tax returns for the previous three years have been accurately filed and on time.
- The tax debt must be assessed at least 240 days before filing for bankruptcy:
The IRS must have assessed the tax debt at least 240 days before the bankruptcy petition. This typically occurs when the IRS completes an audit or when the individual files an amended return.
- The taxpayer must not have engaged in fraudulent behavior:
If a taxpayer is found to have intentionally engaged in any fraudulent activity such as tax evasion, their tax debt will not be dischargeable through bankruptcy.
Some tax debts, such as those resulting from the taxpayer’s willful evasion or fraudulent tax return, cannot be discharged through bankruptcy.
Chapter 13 bankruptcy, also known as reorganization bankruptcy, involves creating a repayment plan over a period of three to five years. Under this bankruptcy type, tax debt can be included in the repayment plan and paid off gradually.
To discharge tax debt through Chapter 13 bankruptcy, certain conditions must be met:
- The tax return must have been filed:
In order to include tax debt in a Chapter 13 plan, the taxpayer must have filed all required tax returns.
- The tax debt must not be a priority debt:
Priority taxes, such as payroll-related taxes and taxes withheld from employees, cannot be discharged through bankruptcy. They can be included in the repayment plan.
Are There Alternatives to Filing Bankruptcy for IRS Tax Debt?
Filing for bankruptcy can have long-term consequences on an individual’s credit score and financial future.
One alternative to bankruptcy is negotiating with the IRS for an installment agreement. This allows taxpayers to pay their debt over time, making regular monthly payments to the IRS until the debt is fully paid off. This option can be more manageable for individuals who are unable to discharge their tax debt through bankruptcy.
Another option is an offer in compromise (OIC), which allows taxpayers to settle their tax debt for less than the full amount owed. An OIC is not easy to obtain, as it requires demonstrating financial hardship and showing that full payment of the tax debt would be unreasonably burdensome. [2]
Seeking professional help from a tax attorney or a certified public accountant (CPA) is advisable when dealing with tax debt. These professionals can provide expert advice on the best course of action based on individual circumstances.
Can You Discharge a Federal Tax Lien?
The Internal Revenue Service (IRS) is notoriously stringent when it comes to collecting outstanding tax debts. A federal tax lien is one tool the IRS uses to secure its claim against a taxpayer’s property. It is a legal claim against the taxpayer’s assets, including real estate, financial accounts, and personal property. It serves to protect the government’s interests and act as a public record, notifying other creditors of the IRS’s priority in collecting the owed tax.
Bankruptcy does not erase or eliminate a federal tax lien. Even though the bankruptcy process may afford some relief or repayment options, the lien will still attach to the taxpayer’s property. Bankruptcy may help release certain assets from the lien, creating an opportunity for the taxpayer to retain possession or perhaps sell the property without the lien’s interference.
Should You File Bankruptcy Before or After Filing Taxes?
If you are struggling with overwhelming tax debt and cannot afford to pay it, filing for bankruptcy before filing your taxes might be a wise choice. By doing so, you can potentially discharge your tax debt and eliminate the need for tax filing altogether. In some situations, filing for bankruptcy before filing taxes may lead to complications.
One such complication arises when individuals are eligible for tax refunds. Tax refunds are considered an asset and may be subject to liquidation to pay off creditors during bankruptcy. If you file for bankruptcy before receiving your tax refund, consult with a bankruptcy attorney to determine the best course of action to protect your refund.
On the other hand, filing for bankruptcy after filing taxes may be preferable if you anticipate a substantial tax refund. By receiving your refund before filing for bankruptcy, you can use it strategically to pay for necessary bankruptcy expenses or secure exemptions that safeguard certain assets.
Attempting to manipulate the timing of your bankruptcy filing solely to discharge tax debt might lead to severe consequences, including penalties or even criminal charges.
Contact Richard West today to schedule a consultation and take the first step towards resolving your IRS debt through bankruptcy. Don’t let tax debt hold you back any longer.
FAQs
Consult with a qualified bankruptcy attorney or tax professional who can assess your specific circumstances. They will review your overall debt, income, expenses, and the type of tax debt you owe. They will also consider any other possible options for resolving the IRS debt, such as negotiating an offer in compromise or setting up an installment agreement.
Chapter 7 bankruptcy does not discharge penalties or interest on tax debts, meaning they will still need to be paid. Chapter 13 bankruptcy may allow for the discharge of some or all penalties and interest, depending on the individual’s repayment plan.
When an individual files for bankruptcy, an automatic stay is issued, which halts most creditor collection actions, including those taken by the IRS. This means that garnishments on wages or bank accounts will be temporarily suspended, and the IRS will not be able to enforce liens or seize assets during the bankruptcy process. Certain tax debts may not be dischargeable in bankruptcy, and the automatic stay granted by bankruptcy only provides temporary relief.
Sources:
[1] Henricks, M. (2022, May 31). Can Filing For Bankruptcy Make Your Tax Debt Go Away? Forbes Advisor. https://www.forbes.com/advisor/debt-relief/does-bankruptcy-clear-tax-debt/
[2] Offer in Compromise | Internal Revenue Service. (n.d.). https://www.irs.gov/payments/offer-in-compromise
