A Simple Explanation Of Tax Debt And Bankruptcy

Taxes. So many rules and can be so confusing! Tax issues relating to bankruptcy should be handled and reviewed on a case by case basis. Some factors to consider are, what years you owe, when was the tax return filed and how is this tax categorized?

Most people will tell you that if you file for bankruptcy, tax debt is not eligible to be wiped out. Fortunately, our firm knows that some types of tax debt are actually eligible for a discharge! Also, for the types of tax debt that is not eligible to be wiped out, a strategic plan can be created for your specific situation to make payments affordable.

Filing for Bankruptcy Can Stop the IRS

Generally, once a bankruptcy case is filed, the Automatic Stay immediately goes into effect! This means all collection activity must stop. Except for specific circumstances, creditors will have to file a motion to remove the Automatic Stay so they can resume collecting on their debt.

Filing for bankruptcy can temporarily halt the IRS from pursuing certain collection activities. When you file for bankruptcy, an automatic stay goes into effect, which generally prevents creditors, including the IRS, from continuing collection efforts during the bankruptcy proceedings. This provides a temporary relief and allows you and the bankruptcy court to work on a plan for managing your debts.

However, it's important to note that not all tax debts are dischargeable in bankruptcy. Income tax debts meeting specific criteria may be eligible for discharge, but other types of taxes or tax debts resulting from fraud or evasion typically cannot be discharged.

Before relying on bankruptcy to address tax issues, it's crucial to consult with a qualified bankruptcy attorney and possibly a tax professional. They can provide guidance on whether your specific tax situation is eligible for discharge and help you navigate the complexities of bankruptcy law and tax regulations.

Which Tax Debts Can You Discharge

You can discharge eligible tax debt! Also, in a Chapter 13, you can repay the required balance that cannot be wiped out, and at times, at more affordable monthly payments. Here are some pointers to consider, below:

• NO FRAUD OR WILLFUL EVASION: Taxes accrued from payroll or fraud unfortunately are not eligible for discharge

• If a fraudulent tax return was filed with a fake social security number, this tax debt will not be dischargeable.

• AGE OF TAX DEBT: Tax debt that is three years or older can be wiped out!

• ASSESSMENT OF TAX DEBT: The year in question must have been filed with the IRS two years before the bankruptcy case is filed to be eligible for non-repayment

• FILING OF TAX RETURNS: You must have your income tax debt assessed by the IRS at least 240 days prior to your bankruptcy filing. That or it must not have been assessed at all.

Federal Tax Lien

If you successfully qualify under Bankruptcy to discharge your taxes be careful of tax liens. You may no longer have a personal obligation to pay eligible tax debt but if your real property already had a tax lien attached to it, the lien will remain until your house is sold/paid off.

A federal tax lien is a legal claim by the U.S. government against your property when you neglect or fail to pay a tax debt. It serves as a way for the government to secure its interest in your assets until you fully satisfy your tax liability. The IRS may file a Notice of Federal Tax Lien after:

 1. **Assessment of Tax Debt:** Once the IRS assesses the amount you owe and sends you a bill, the lien process may begin if you don't fully pay the debt.

 2. **Notice and Demand for Payment:** The IRS sends a Notice and Demand for Payment, informing you of the amount owed. If you don't respond or pay within the specified time, a federal tax lien can be initiated.

 A federal tax lien is not a seizure of your property; rather, it's a claim against your assets. It alerts other creditors that the IRS has a legal right to your property, making it challenging to sell or transfer assets until the tax debt is resolved.

To remove a federal tax lien, you typically need to:

 1. **Pay the Tax Debt in Full:** Once the tax debt is satisfied, the IRS will release the lien within 30 days.

 2. **Settle the Debt Through an Offer in Compromise or Installment Agreement:** If you qualify for these programs and fulfill the terms, the IRS may release the lien.

 3. **Wait for the Expiration:** A federal tax lien automatically expires ten years after the IRS assesses the tax, though the IRS may extend this period under certain circumstances.

A federal tax lien can impact your credit score and make it more challenging to secure loans or sell property. It's advisable to address tax debts promptly and explore options for resolving the issue with the IRS.

What About Non-Dischargeable Tax Debts?

Different bankruptcy chapters, different treatment.

• Chapter 7 Bankruptcy: does not have much effect on tax debts. IRS will be able to continue collecting on this debt after your Chapter 7 is complete.

• Chapter 13 Bankruptcy allows you to repay your IRS debt (along with your other debts) over a three- to five-year period.

If you need help filing for bankruptcy call the Law Offices of Bankruptcy Near Me, LLC today at (301) 550-5408 for a free, no-obligation, consultation.