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Can Irs Debt Be Discharged In Bankruptcy

Different Types Of Bankruptcy

Can IRS Debt Be Discharged in Bankruptcy? The Answer May Surprise You!

Different chapters of bankruptcy work differently. Depending on which one you file, you may be able to clear your IRS debt with bankruptcy.

There are several types of bankruptcy you can declare. The two main types are Chapter 7 and Chapter 13.

To more accurately answer the question: Does bankruptcy clear IRS debt? you need to understand how each type of bankruptcy works.

First, when you file, an automatic stay goes into effect. This means that debtors are no longer allowed to collect the debt until the process is over. This includes IRS tax debt.

You may be able to avoid declaring bankruptcy due to a huge tax debt. Its important to find a great tax attorney.

A few things to remember if you want to include IRS tax debt in bankruptcy:

  • You must have filed taxes within 2 the past two years.
  • You cant have purposely committed tax fraud to evade paying taxes.
  • They must be wage-related or business income taxes.
  • It must have been at least three years since your taxes that you are listing were due.
  • Your tax bill must have been billed 240 days ago more.

Do You Have To File A Tax Return When Going Through Bankruptcy

While you can sometimes deal with past tax debt through a bankruptcy filing, you wont be protected from all past, current or future tax liability or obligations to the IRS.

  • Chapter 13 filers are required to file returns for tax periods ending within four years of the bankruptcy filing before you have a meeting with creditors to work out your debt repayment plan.
  • In Chapter 7 and Chapter 11, the bankruptcy estate that takes ownership of your assets is also required to file a separate tax return. The return must be filed by the trustee appointed to manage assets but sometimes in Chapter 11, the bankruptcy filer acts as the trustee and thus must take on this obligation.

And, no matter what chapter of bankruptcy you file under, all tax returns due after you file must be submitted on time unless you file for an extension. Failing to file or request an extension can result in dismissal of your bankruptcy proceedings or conversion of your bankruptcy to a different type.

Why Addressing Tax Debt Is Important

Ideally, you should never ignore any type of debt. Debts tend to grow over time due to a combination of late fee penalties and interest. Should a balance become high enough, creditors will likely begin to hound you for payment. If the debt persists, they may even file a lawsuit against you in an effort to collect.

Owing money to a government agency like IRS can lead to even more severe and immediate consequences. Accumulating tax debt can also be startlingly common. The United States tax code constantly changes with new administrations and legislations, making filing for taxes each year a stressful and confusing endeavor for many Americans. It can be extremely easy to make mistakes in reporting income or making deductions, resulting in your owing money you did not initially realize or plan for.

The IRS, as a federal government agency, has more powers in collecting payment on an outstanding tax bill, including the doling out of significant punitive measures to debtors. This includes tools not available to other types of creditors or collection agents.

At first, a tax bill will typically operate like other debts. There will be a deadline in which you are expected to pay. If you do not meet it, you can expect to hear from IRS agents, either through letters in the mail or phone calls. These communications will explain what you owe and what could happen if you do not promptly repay.

The IRS may consider the following actions if you fail to pay tax debts:

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The Return Was Due At Least Three Years Ago

The tax debt must be related to a tax return that was due at least three years before the taxpayer files for bankruptcy. The due date includes any extensions you took, so you wouldn’t be able to include a tax debt in a bankruptcy filing until at least October 2024 if you were to request and receive an extension for your 2020 return, making it due in October 2021.

Some Good News About Bankruptcy

Can Income Tax Debt Be Discharged in Chapter 7 Bankruptcy ...

The IRS considers many types of canceled debt to be taxable income. For example, if you get a credit card issuer to agree to cancel $5,000 of your credit card debt, you might have to count that amount as taxable income when you file your federal income tax return.

However, debt canceled in Chapter 11 bankruptcy is not considered taxable income.

That means if you owed taxes and got them canceled as part of a bankruptcy proceeding, you will not have to report that amount or any of your other debt forgiven by the bankruptcy as taxable income on a future tax return. But you may have to file a form with the IRS to verify that the debt was discharged through bankruptcy and therefore isnt taxable income.

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Have At Least 240 Days Passed Since The Date On Which The Irs Assessed The Tax Debt At Issue

11 U.S.C. § 507. Assessments can follow an audit, examination, or amended return. Beware the sleeping assessment. The IRS has three years to assess taxes and penalties, from the date the return was filed. That means taxes can be assessed upon filing, and then again up to three years later if there is an increase in tax or a penalty following an audit or examination. Thus, its often not as simple as waiting until 240 days have passed from assessment you dont want to file a bankruptcy only to find out in the middle of it that additional taxes have been assessed, because they wont be dischargeable. Beware that this 240-day period is extended by an offer in compromise plus 30 days. 11 U.S.C. §507.

Taxes Not Dischargeable Through A Chapter 13 Payment Plan

In a Chapter 13, income tax debt is not dischargeable, but may be paid at 0% interest in a Chapter 13 payment plan. This is a lesser interest rate than payment plans through the IRS. By taking your total amount of income tax debt and dividing it over a five year plan, your monthly payments can be significantly reduced.

This will stop collection efforts and give you a chance to breathe. The penalties and post-petition interest that youd normally pay on those taxes wont be paid through the Chapter 13 plan because theyre considered unsecured debt.

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Can Bankruptcy Stop Tax Liens

Does bankruptcy remove tax liens? The answer is a partial yes. Legal and tax experts agree that bankruptcy cannot completely stop pre-existing tax liens by the IRS.

While the automatic stay will stop new lien petitions, existing liens arent removed when you file for bankruptcy. For bankruptcy and IRS liens which existed prior to bankruptcy, the bankruptcy will be of little effect.

Heres how it works. If you have a federal tax lien placed on any property because of back taxes that you owe, the discharge of that debt during bankruptcy wont remove the lien. The lien will have to be removed separately if you wish to sell your property with clear title.

Therefore, bankruptcy for liens is not the best option. One recommendation is to get back on your feet financially, through bankruptcy, and then attack the liens with help from your lawyer.

Things To Consider Surrendering Of Secured Assets

How Can Bankruptcy Settle IRS Tax Debt?

When you claim bankruptcy, you must surrender your assets, such as your home or your vehicle. This might not make sense if youve built up a fair amount of equity. For example, if you have $200,000 of net worth in your home, it doesnt make sense to give it up. Instead of filing for bankruptcy, youre likely better off with a consumer proposal, which allows you to hold on to your assets.

An exception to this would be if you did not have sufficient equity in your home or your car. There is an allowable amount of equity by which you can maintain these assets, but it varies slightly in each province. For example, if you are the sole owner of a home in Manitoba, you are only permitted to hold onto $2500 of equity in the property. If you own a car in Alberta, the maximum value, or equity, is $5000.

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Let Us Help Determine How Bankruptcy Can Help You Manage Tax Debt

For over a decade, our team at Dethlefs Pykosh & Murphy have helped clients throughout Pennsylvania build new financial futures through bankruptcy. We understand how stressful owing money to the IRS can be, and we are determined to help you identify legal solutions for getting on top of your debt. Our bankruptcy lawyers can evaluate whether your tax debt may be dischargeable through bankruptcy, and if not, identify other strategies that can help you overcome overwhelming debt.

The sooner you act to address IRS debt, the better. Call 559-0271 or contact us online to schedule a free consultation.

What Are The Consequences Of Filing A Second Bankruptcy

In the circumstances in which you may need to file a second bankruptcy, there are some long term consequences. If you repeat bankruptcy, it can become more restrictive. For instance, with a second bankruptcy, you do not qualify for an automatic discharge from bankruptcy within nine months. In fact, a subsequent bankruptcy is likely to last between a year to three years, depending on what surplus income you may have. A Licensed Insolvency Trustee will ask the court to listen to your application for discharge, to which the court will then decide the terms of your discharge. This includes the duration for which you will be in bankruptcy, and whether or not you need to continue making payments in bankruptcy. Creditors are also able to appeal your discharge, which could mean it takes longer for you to enjoy life after bankruptcy. This stresses the importance of having a reputable Licensed Insolvency Trustee to support you through the process, including offering advice on how to rebuild your credit score. While a first bankruptcy will stay on your credit report for six to seven years, a second bankruptcy can last up to fourteen years, which is worth considering before you proceed.

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You Can’t Discharge A Federal Tax Lien

If your taxes qualify for discharge in a Chapter 7 bankruptcy case, your victory may be bittersweet. Why? Bankruptcy won’t wipe out prior recorded tax liens. Chapter 7 bankruptcy will wipe out your personal obligation to pay the qualifying tax and prevent the IRS from going after your bank account or wages. But if the IRS recorded a tax lien on your property before the bankruptcy filing, the lien will remain on the property. You’ll have to pay off the tax lien before selling and transferring the property’s title to a new owner.

Can Bankruptcys Automatic Stay Stop Tax Collections

How do I know if my income tax debt is dischargeable in ...

From a bankruptcy perspective, the IRS is treated the same as any other debt collector. This means that the automatic stay of collection actions which is included as part of the bankruptcy process will prevent most collection activities of the IRS, including collection letters and balance due notices, wage garnishment, bank account levies, property seizure, and offsets of due amounts against any tax refund you are entitled to.

Note that the automatic stay will expire when your bankruptcy discharge is entered, and/or your case is closed or dismissed. Also, if you owe tax debt to the IRS, the agency does also have the power to hold back your refund, even if it cant take it away, and to intercept your refund if you owe child support.

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Most Taxes Can’t Be Eliminated In Bankruptcy But Some Can

Updated by Cara O’Neill, Attorney

If you’ve heard commercials offering the hope of eliminating tax debts in bankruptcy, be cautious. It’s not as simple as it sounds. Most tax debts can’t be wiped out in bankruptcyyou’ll continue to owe them at the end of a Chapter 7 bankruptcy case or have to repay them in full in a Chapter 13 bankruptcy repayment plan. In this article, learn:

  • when you can discharge a tax debt
  • what happens with federal liens, and
  • how to manage tax debt using Chapter 13.

You’ll also learn the pros and cons of filing tax returns before or after bankruptcy.

If you’d like step-by-step guidance through the bankruptcy process, read What You Need to Know to File for Bankruptcy in 2021.

How Many Times Can An Individual File Bankruptcy

Posted on 20 December 2021

Ever wondered how many times can an individual file bankruptcy? Perhaps you have already filed bankruptcy once before, and may find yourself in a situation where you are facing overwhelming debt once again. So, can you file bankruptcy a second time? And what are the consequences involved in doing so? What if you need to file bankruptcy a subsequent time is that possible? In this article, we share the answer to how many times can an individual file bankruptcy? As one of the leading bankruptcy firms in Canada, our reputable Licensed Insolvency Trustees will provide to help you through any financial situation, no matter how bad you feel it may be. There is always a solution to get you on the pathway to financial freedom, and we are here to help you.

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Limits To The Automatic Stay

The auto-stay may be limited to 30 days after you file your case if you filed another bankruptcy in the previous year and voluntarily dismissed that case. This limit was put into place to prevent debtors from filing multiple bankruptcies just to hold their creditors at bay. If you filed a bankruptcy in the last year, you can request that the court extend the auto-stay, but you must first show the court that you filed your cases in good faith and not to abuse the auto-stay.

If you filed two or more bankruptcies in the previous year and voluntarily dismissed them, you will not be protected by the auto-stay, unless you prove to the court that you filed in good faith.

Additionally, a creditor can request relief from the auto-stay, meaning it can ask the court for permission to collect. Most commonly, this happens with secured debt related to real estate or cars, but the IRS can seek relief from the court if you committed tax fraud.

Is Tax Debt Discharged In Bankruptcy

Bankruptcy: Can Income Taxes Be Discharged? (Part 1)

Although the automatic stay will stop the IRS or state taxing authority from collecting tax debts during your bankruptcy , whether your tax debt will be wiped out at the close of your bankruptcy is another matter. To learn more, see our area on Tax Debts in Bankruptcy.

Take our bankruptcy quiz to identify potential issues and learn how to best proceed with your bankruptcy case.

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Eliminating Tax Debt In Bankruptcy

The following set out the rules to discharge an IRS debt in Bankruptcy:

  • You filed the Income tax return. At times the IRS files substitute returns when an individual has failed to file. Another name for this is Service Filed Returns. The amounts due on IRS filed returns are not dischargeable.
  • The tax is for income-an income tax. You cannot discharge payroll taxes.
  • The tax debt is at least 3 years old. Generally, the due date is April 15th. If April 15th falls on a Saturday or Sunday the due date will be the 16th, 17th, or 18th. If you have filed for an extension of the filing date, the due date is October 15th, or the 16th, 17th or 18th.
  • You filed the tax return more than 2 years ago. So, late filed tax debts can be discharged.
  • The tax assessment was more than 240 days ago.
  • There was no Fraud or Willful Evasion.
  • There has not been a tolling. Written agreements with the IRS can extend the time to discharge IRS debts.
  • You can get your IRS transcripts by going to Get Transcript FAQs

    When I explain the above mentioned rules to clients they look at me glassy eyed. I dont blame them. The rules are legalistic and confusing.

    For 99% plus of clients I have had there are only 3 rules that apply:

  • The taxes are over 3 years old. That means any IRS taxes owed for the year 2016 or before
  • You filed the taxes and not the IRS and
  • Tax returns for 2015 and before were filed more than 2 years ago.
  • The following is an example of the most common situation:

  • Or, were they filed late?
  • Can I Discharge Income Tax Debt Through Bankruptcy

    Oct 7, 2021Bankruptcy

    Filing for Chapter 7 bankruptcy or Chapter 13 bankruptcy helps many individuals get on top of insurmountable debts. In addition to enjoying benefits like the automatic stay, which freezes collection actions, filers are typically permitted to discharge unsecured debts following the successful completion of the bankruptcy.

    Not all types of debt can be discharged, however, and it is important to evaluate whether bankruptcy makes sense for your financial situation with a legal professional. You may be wondering if it is ever possible to discharge tax debt, or money owed to the Internal Revenue Service , the government agency responsible for managing the countrys federal tax system. Discharging tax debt is not as simple or open and shut as discharging unsecured debt, but there are certain conditions in which you are permitted to discharge money owed to the IRS.

    Below, we will discuss the consequences of ignoring tax debt and how bankruptcy can be potentially be used to combat it. We will also discuss the conditions in which tax debt can be discharged and alternative ways bankruptcy can address the problem.

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