Tax season is upon us again, and for many that means tax and other IRS debts. Those struggling to pay off tax related debts may be wondering: can you file bankruptcy on IRS debt? The answer depends on your individual circumstances, but in many cases, bankruptcy offers quick, lasting relief from tax debts. Read ahead to find out when IRS debt can be discharged through bankruptcy.
Automatic Stay On Collection
When you file for bankruptcy, an automatic stay is placed on all debt collection while your case awaits court processing. This means all debtors are prohibited from attempting to collect any payments from you until your case is settled. This goes for credit card debt, some mortgages, car payments, and also tax debt through the IRS Insolvency Unit which deals with bankruptcy cases. Until your bankruptcy is closed, the IRS cannot attempt to collect their debt from you. However, just because they can’t collect doesn’t mean the IRS can’t request that you file any delinquent returns. A late return carries not only your balance but also additional penalties and interest.
Bankruptcy and the IRS
There are advantages to bankruptcy beyond the temporary Automatic Stay protection. In many cases, your bankruptcy can extend the time required to pay your debt. The IRS is considered a priority creditor in most cases, meaning the interest is secured by the Notice of Federal Tax Lien. This instrument is used by the IRS to set a claim against your property for payment. The IRS, unlike a credit card company, has greater power to reach some kinds of assets, possibly including your home.
When Can IRS Debt be Discharged?
IRS and tax debt can be normally be discharged if the following conditions are met:
- The taxes owed are income taxes (as opposed to payroll taxes, property taxes, etc.)
- Tax debt is at least three years old
- A tax return was filed for the debt two or more years prior to filing bankruptcy
- Tax debt was assessed by an IRS agent a minimum of 240 days before bankruptcy petition, or not yet assessed at all. (some exceptions apply)
- You have not committed tax fraud or evasion
What kind of bankruptcy to file
Chapter 7, a basic liquidation of assets and the most common type of bankruptcy, will hand over your assets to a trustee who will distribute your assets to debtors. The IRS, as a secured creditor, will probably get first dibs on your assets. In Chapter 13 bankruptcy, which is a reorganization of your debts, you are required to develop a repayment plan. Once again you’ll have a trustee charged with using your payments to repay debts, with the IRS remaining a priority. No matter the type of filing, IRS debt can be tricky to dispense and depends mostly on the amount, age, and type of debt you owe. In general, older debts (over three years) are easier to discharge while more recent tax debt may be difficult to erase.
If you need debt help finding debt relief or more information about filing for bankruptcy, contact attorney Anthony DeLuca at (702) 252-4673 for a free consultation.