What Type of IRS Debt will a Bankruptcy Wipe out
Debt owed to the Internal Revenue Service is one of the most protected debts within the bankruptcy code. It is likely that Congress carved out specific protections for IRS debt because the policy behind federal and state taxation is that we, as citizens, collectively pay our share since we collectively enjoy the benefits. But that does not mean certain IRS debt cannot be forgiven; this article will discuss which types of IRS debt can be forgiven through a bankruptcy.
The rule governing tax debts is found in Section 523(a)(1) of the United States Bankruptcy code and reads in pertinent parts as follows:
"A discharge under section 727, 1141, 1228(a), 1228(b) or 1328(b) of this title does not discharge and individual debtor from any debt -
(1) for a tax or customs duty-
(A) of the kind for the periods specified in section 507(a)(3) or 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed;
(B) with respect to which a return, or equivalent report or notice, if required -
(i) was not filed or given; or
(ii) was filed or given after the date on which such return, report, or notice was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition.
In summary this rule is interpreted as follows: If the tax return was filed on time with the IRS or State Taxing Authority and is more than 3 years old and has not been audited within 240 days before the petition date, then that tax is dischargeable. If the tax liability is different in anyway from the above sentence then it is not forgiven and must be paid.
Conditions that must be present in order to discharge tax debt in bankruptcy:
The number one lesson to take away from this article is to never ignore timely filing your tax returns. A consumer can always amend a previous year's tax return to correct it, but if you miss the deadline it is considered late always.
If a consumer has found themselves in a tax situation where the IRS is auditing them or garnishing wages or the like, bankruptcy still can provide a benefit. Because of the protection that is triggered upon filing a petition for relief any wage garnishment or IRS audit will cease. Ultimately the IRS will be able to continue an audit to determine what it believes is the true tax debt, but the bankruptcy would slow the process and allow your bankruptcy attorney to get involved and make sure the audit is correct and the consumer is not being overcharged.
Moreover, if a consumer completely disagrees with a tax assessment and does have evidence that the assessed amount is incorrect the bankruptcy code does afford consumers a remedy. A consumer can sue the IRS in the bankruptcy to determine the dischargeability of a debt; meaning a consumer can force the bankruptcy Judge to issue a ruling determining what amount of IRS debt must be paid. Most of the time a lawsuit to determine dischargeablity is not included in the standard legal fees, so consumers need to keep the extra cost in mind, and the lawsuit needs to be based on evidence not just a disagreement with an assessed amount. For example, a consumer would need to prove that the IRS is not giving credit for a valid deduction which is causing the tax liability to be inflated; a concrete reason is needed in order to bring a lawsuit to determine dischargeablity.
However, ultimately if a consumer is required to pay the IRS money the bankruptcy code does make it affordable. Bankruptcy is the only way you can pay the IRS back at 0% interest and zero penalties. Therefore the payment plan is all going towards the principle owed, which is the best payment plan to have.
Tax debt is difficult to understand and is a protected debt that cannot be ignored, if you are a consumer facing tax problems you should consult with a Dallas bankruptcy lawyer to get the best advice available.
The rule governing tax debts is found in Section 523(a)(1) of the United States Bankruptcy code and reads in pertinent parts as follows:
"A discharge under section 727, 1141, 1228(a), 1228(b) or 1328(b) of this title does not discharge and individual debtor from any debt -
(1) for a tax or customs duty-
(A) of the kind for the periods specified in section 507(a)(3) or 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed;
(B) with respect to which a return, or equivalent report or notice, if required -
(i) was not filed or given; or
(ii) was filed or given after the date on which such return, report, or notice was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition.
In summary this rule is interpreted as follows: If the tax return was filed on time with the IRS or State Taxing Authority and is more than 3 years old and has not been audited within 240 days before the petition date, then that tax is dischargeable. If the tax liability is different in anyway from the above sentence then it is not forgiven and must be paid.
Conditions that must be present in order to discharge tax debt in bankruptcy:
- The filed return must be a 1040 or 1040ez, which means it is a tax return filed by a consumer; if the IRS or State files a substitute return then the tax debt is not forgiven, even if it is older than 3 years.
- It must have been filed timely; if the IRS can prove the return was not filed timely then the tax debt is not forgiven even if it is older than 3 years. This means if you did not file for several years and then you batch file for a group of years, then wait the required 3 years before you file a bankruptcy, that IRS debt is not dischargeable, even though the debt is older than 3 years.
The number one lesson to take away from this article is to never ignore timely filing your tax returns. A consumer can always amend a previous year's tax return to correct it, but if you miss the deadline it is considered late always.
If a consumer has found themselves in a tax situation where the IRS is auditing them or garnishing wages or the like, bankruptcy still can provide a benefit. Because of the protection that is triggered upon filing a petition for relief any wage garnishment or IRS audit will cease. Ultimately the IRS will be able to continue an audit to determine what it believes is the true tax debt, but the bankruptcy would slow the process and allow your bankruptcy attorney to get involved and make sure the audit is correct and the consumer is not being overcharged.
Moreover, if a consumer completely disagrees with a tax assessment and does have evidence that the assessed amount is incorrect the bankruptcy code does afford consumers a remedy. A consumer can sue the IRS in the bankruptcy to determine the dischargeability of a debt; meaning a consumer can force the bankruptcy Judge to issue a ruling determining what amount of IRS debt must be paid. Most of the time a lawsuit to determine dischargeablity is not included in the standard legal fees, so consumers need to keep the extra cost in mind, and the lawsuit needs to be based on evidence not just a disagreement with an assessed amount. For example, a consumer would need to prove that the IRS is not giving credit for a valid deduction which is causing the tax liability to be inflated; a concrete reason is needed in order to bring a lawsuit to determine dischargeablity.
However, ultimately if a consumer is required to pay the IRS money the bankruptcy code does make it affordable. Bankruptcy is the only way you can pay the IRS back at 0% interest and zero penalties. Therefore the payment plan is all going towards the principle owed, which is the best payment plan to have.
Tax debt is difficult to understand and is a protected debt that cannot be ignored, if you are a consumer facing tax problems you should consult with a Dallas bankruptcy lawyer to get the best advice available.
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