Taxpayers are often under the mistaken belief that their tax liabilities are not dischargeable in bankruptcy. Taxes can be discharged in bankruptcy.
Generally, older Federal income tax debts are dischargeable in bankruptcy. By “older” we are referring to tax debts more than three years old and for which the tax return, if one was to be filed, was filed more than 240 days prior to filing the bankruptcy petition.
Discharging taxes in bankruptcy may not be the only benefit of filing bankruptcy. Other benefits can include:
1. Stopping the IRS collection efforts. Filing a bankruptcy petition typically stops the IRS’s collections activities. Therefore, bankruptcy may be a viable option to prevent the IRS from levying on wages or other assets.
2. Discharging some IRS tax penalties in bankruptcy.
3. Stopping the accrual of interest on unpaid tax debts during the bankruptcy proceeding.
These are just a few examples.
If the tax debt and penalties are not dischargeable in bankruptcy, then it is still possible that the tax debt and penalties can be restructured in bankruptcy. The bankruptcy payment plan may be better than the alternative payment plan afforded by the IRS.
There are also several disadvantages to filing bankruptcy that must be considered, however. One such disadvantage is that the IRS’s liens may survive the bankruptcy process. This can be problematic if there are assets that are excluded from the bankruptcy (such as retirement accounts) rather than exempt assets (such as personal residences, etc.). The lien will continue to attach to the excluded (not exempt) assets even though the taxpayer’s personal liability for the unpaid tax debts is discharged in bankruptcy.
The IRS’s post-bankruptcy collections activities can also be problematic. To the extent that all of the tax debt is not discharged in bankruptcy, the IRS may view the taxpayer (who now has fewer debts) as being in a better position to pay the IRS.
The bankruptcy tax laws are constantly changing. An experienced tax attorney who follows this area of law can help you determine if bankruptcy is a viable option for resolving your tax debt.
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