The IRS Can't Collect If You are Bankrupt!
Numerous people have to pay money because of financial issues. Among creditors, the IRS is the most ruthless and utilize certain techniques to collect tax debts. You can get the IRS off your back with the protection made available by a bankruptcy claim.
Taxpayers generally misconstrue bankruptcy. It is often seen as a simple escape or method that enables people to skip out on their debts. This is not true. Bankruptcy helps people seek relief from debt legally, including tax debt. When you file for a Chapter 7 bankruptcy, there's a significant chance that, along with all of your regular debts, your tax debt will also be cancelled. This can occur, but there's obviously no guarantee that your tax debt will be included. Anyone filing a Chapter 11, 12, or 13 bankruptcy has the ability to solve their IRS problem through a payment option.
When you file for bankruptcy, you get legal protection which is often called the 'automatic stay'. Once you've filed for bankruptcy, all of your creditors, including the IRS, should cease all actions against you. The sole way creditors can bypass the stay while your bankruptcy is still being dismissed or discharged is to appeal to the bankruptcy court. Judges rarely lift the automatic stay, although the IRS is a government office. The IRS has to give evidence that fraud is being made for that to occur. You have more serious IRS problems on your hand if you are conducting fraud.
The statute of limitations is effectively prolonged when you file for bankruptcy. Essentially, the 'clock' stops until the bankruptcy is either discharged or dismissed. If it is dismissed, then the clock goes on from that point forward.
The sole form of bankruptcy that will erase any tax debts definitely is the Chapter 7 bankruptcy. For tax debts to be eligible for discharge in a Chapter 7 bankruptcy claim, specific conditions must be met. For instance, the 3-year rule should be satisfied during the bankruptcy proceeding. The 3-year rule states that any tax debts should come from a tax return that was filed no less than 3 years prior to the year you file for bankruptcy. This includes extensions, although typically pointing to April 15 of the year the return was filed.
There's also the two-year rule which includes taxes filed 2 years before bankruptcy. Another rule is the 240-day rule, applied to taxes assessed 240 days prior to bankruptcy filing.
If a tax lien was filed before filing bankruptcy, the IRS still has rights to the taxpayer's property, even by filing a Chapter 7 bankruptcy. This is a considerably important loophole that the IRS applies. The taxpayer basically is bought time to settle the IRS issue by re-organization when a Chapter 11, 12, or 13 bankruptcy is filed.
ABOUT THE AUTHOR: Darrin T. Mish
Darrin T. Mish is a nationally recognized tax attorney whose practice represents clients nationally and internationally with IRS problems. With over a decade of experience resolving clients’ IRS issues, he is AV rated by Martindale-Hubbell and has been honored by a listing in Martindale-Hubbell’s Bar Register of Preeminent Lawyers. He is a member of the American Society of IRS Problem Solvers and the Tax Freedom Institute. With a passion for providing IRS help to taxpayers with both individual and payroll tax problems, he travels the country training attorneys, CPAs, and enrolled agents on how to handle their toughest cases with the IRS.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.