Can Bankruptcy Stop IRS Debt?
The Internal Revenue Service is the world’s largest collection agency. And, since the tax gap (difference between income taxes owed and paid) is over $400 billion a year, the IRS is also one of the most aggressive collection agencies in the world.
Since income taxes are unsecured debts, they are dischargeable in a Chapter 7. However, this debt is tencially priority unsecured debts. So, back taxes are only dischargeable in certain situations, as outlined below. It is also possible to roll unpaid taxes into a Chapter 13 repayment plan.
The bottom line is that, if you have federal or state income tax debt, bankruptcy provides legal options. A Chicago bankruptcy lawyer can effectively advise you regarding these options. Furthermore, a lawyer can stand up for you in court during a hearing on an objection to discharge. These hearings are practically inevitable in these situations.
Tax Discharge Rules
The income tax discharge rules are relatively straightforward. Income tax is dischargeable in bankruptcy if:
- Not Fraudulent: Income taxes are not dischargeable if there is direct evidence of fraud, such as using a false Social Security number. Circumstantial evidence of fraud, such as completely omitting a source of income, might be admissible as well.
- Two Years: The taxpayer must have filed a return at least two years prior to filing bankruptcy. Substitute returns which the IRS files on behalf of taxpayers do not count.
- Three Years: The income tax debt must be at least three years old. Note that Tax Day is not always April 15. In 2020, Tax Day was July 15. In many other years, April 15 falls on a Sunday or a holiday.
- 240 Days: Tax debt is nondischargeable if the IRS or other taxing authority has assessed the debt in the last 240 days. Assessment is an accounting term. Generally, if the taxpayer has not received a letter with the amount due in the last eight months, the debt has probably not been assessed.
Discharge means the judge erases the legal obligation to repay the debt. However, the debt itself still exists. So, if the IRS filed a tax lien prior to bankruptcy, an attorney must address that matter separately.
Penalties and interest are also dischargeable under a separate Internal Revenue Code section. The only requirement is that the P&I be at least three years old.
Non-Bankruptcy Options
If you do not qualify for discharge, there are other possible remedies, mostly thanks to the revamped Fresh Start Program.
Recently, the IRS changed the rules for its Offer in Compromise program. Program participants pay what they are able to pay, and the IRS forgives the remaining balance. Some of these recent rule changes include revising the future income calculation and allowing taxpayers a larger living allowance.
Other possible programs include the innocent spouse rule and installment payments. The innocent spouse forgives tax liability if the filer was not privy to certain financial details, and the installment payment program could give you several years to retire tax debt.
Count on Effective Lawyers
Bankruptcy could provide tax tax relief. For a free consultation with an experienced Chicago bankruptcy lawyer, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.
https://bentzholguinlaw.com/what-is-zombie-debt/
