Will Filing Bankruptcy Stop IRS Debt?
Although the IRS is a federal agency, for bankruptcy purposes, it’s basically just another unsecured debt collector. As a result, the Automatic Stay applies to IRS debt. When people file bankruptcy, the IRS cannot garnish your wages, file a credit or property lien, or take any other adverse action.
IRS pressure and threats force many people to file bankruptcy. Two-thirds of American workers have a side hustle. Almost half of these individuals started the side hustle within the last three years. Unpredictable income swings are the norm for new enterprises such as these. So, it’s relatively easy to fall behind on estimated tax payments.
Distressed debtors who work with a Chicago bankruptcy attorney normally have several legal and financial options in this area. Each one has some pros and cons. But they all have at least one thing in common. Filing bankruptcy gives taxpayers control over their own financial situations.
Discharging Taxes in a Chapter 7
As mentioned, income taxes are unsecured debts. Taxpayers simply promise to pay them. In that respect, past-due income taxes are just like medical bills, credit cards, and other dischargeable debts. However, under the Bankruptcy Code, back taxes are priority unsecured debts. So, they are only dischargeable in certain situations. The major rules follow the calendar, as follows:
- 240 Days: Income taxes are dischargeable if the IRS, or a similar state tax agency, hasn’t assessed the debt within the last eight months. A tax transcript indicates when, and if, the debt was assessed, an accounting term which basically means “totaled.” Generally, if the taxpayer hasn’t received a letter that included the entire amount due, the Service probably hasn’t assessed the debt.
- Two Years: Contrary to popular myth, even if the taxpayer filed a late return, the debt could still be dischargeable. The only rule in this area is that the returns must have been on file for at least two calendar years. Substitute returns, which the IRS sometimes files on behalf of taxpayers in these situations, don’t count.
- Three Years: The income tax debt must be at least three years old. Note that Tax Day is not always April 15. In many years, Tax Day is another date in mid-April. Furthermore, the IRS changed Tax Day 2020 because of the coronavirus pandemic. In the past, IRS lawyers have challenged discharge because the debt wasn’t quite three years old. They will most certainly argue the same thing in your case, if possible.
Additionally, the taxes must be income taxes, and there must be no evidence of willful nonpayment. The Bankruptcy Code doesn’t define either term, so the taxing authority usually has the last word in these matters.
Repaying Back Taxes in a Chapter 13
The 240-day assessment rule often torpedoes discharge claims. If your tax debt is nondischargeable for this reason, or any other reason, repayment in a Chapter 13 is usually an option.
The IRS offers some repayment programs. But these programs usually have very strict eligibility requirements. Additionally, the IRS might require taxpayers to liquidate some assets in order to pay down their tax debts. On the other hand, almost everyone qualifies for Chapter 13 bankruptcy. Furthermore, your house, car, and most other assets are exempt in bankruptcy. So, a creditor, including the IRS, cannot force you to liquidate them.
In borderline discharge cases, many debtors file a Chapter 7 to test the discharge waters. If judges deny their motions, they immediately file Chapter 13 to extend the Automatic Stay and repay the tax debt over time.
Reach Out to Savvy Cook County Lawyers
No matter what kind of financial problem you are having, bankruptcy could be a way out. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. After hours, virtual, and home visits are available.
Resource:
law.cornell.edu/uscode/text/11/362
