People who are facing bankruptcy are under a tremendous deal of stress. Bills pile up and cannot be paid. Creditors begin to harass as people try to juggle the issues of how to pay all the bills while still feeding their family. If one of the debts is owed to the IRS, the amount of stress can be overwhelming.
Bankruptcy is not the ideal location for dealing with tax debts as most of them are not dischargeable. Even if you owe the IRS, however, a bankruptcy may still help you get out of trouble.
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If your other debts are discharged, then you can use your disposable income to pay off the IRS. But first and foremost, you should check to see if your tax debt meets the five requirements to be discharged in bankruptcy.
There are five requirements for a debt to the IRS to be dischargeable in Chapter 7 Bankruptcy:
First, they must be income taxes. Payroll taxes, excise taxes from a business and others will not be discharged.
Second, it must have come due at least three years prior to the filing of a bankruptcy petition. The date a tax comes due is usually April 15 the year after the debt is incurred.
So, for example, a 2009 income debt would first come due April 15, 2010. You cannot file a Chapter 7 Bankruptcy and discharge the tax debt from 2009 until April 15, 2013 at the earliest.
Third, you must have filed a return on the debt at least 2 years prior to filing bankruptcy. In this example, to meet the third prong, you must have filed your tax return for 2009 prior to April 15, 2011 in order for it to be discharged. People who owe taxes and fail to file the return on them get punished later in trying to discharge these debts in bankruptcy.
Fourth, you must not have committed fraud or tried to evade paying on the taxes. The fourth prong is that you must not have engaged in fraud or attempts to evade paying the tax. Filing tax returns with false social security numbers or other methods of avoiding the tax will make it ineligible for discharge.
And fifth, you must pass the 240-day rule, which says the tax is not dischargeable if it has been assessed in the 240 days prior to filing. Documents that you can request from the IRS will show when the tax was assessed but if it falls within this time-frame, it will not be discharged.
If you meet these five requirements, the tax debt will be dischargeable in bankruptcy. But there are a couple more considerations that must be analyzed.
The first is that Chapter 7 will not get rid of a federal tax lien. If the IRS has recorded a tax lien on your property, then this discussion is moot.
An additional, very difficult part of the process of discharging tax debts is that you have to get a ruling from a bankruptcy judge that says the debt is discharged. This involves suing the IRS in bankruptcy court and winning.
This can be quite costly and will go beyond the low flat-fee your bankruptcy attorney charges for a petition that does not include a battle with the I.R.S. If your tax debt is substantial enough and fits into all of the above requirements, it could be well worth the investment.
If the debt is small enough, it may be best to find some other way to get out from under the debt. As mentioned above, when you file a Chapter 7 and get rid of your other debts, you may then have the capacity to pay off the IRS. Also, a Chapter 13 Bankruptcy can also be used to give you 3-5 years to pay off the tax if the IRS will not work with you on payments.
Do not ignore these problems. There are plenty of solutions available if you are drowning financially. If you are facing bankruptcy and your debt to the IRS meets these 5 prongs, make certain you reach out to a bankruptcy attorney to analyze the potential for discharge.
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