Can I Discharge IRS Taxes In Bankruptcy?

IRS debts can be discharged in a Chapter 7.

Eliminating Tax Debt in Bankruptcy

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

  1. 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.
  2. The tax is for income-an income tax. You cannot discharge payroll taxes.
  3. 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.
  4. You filed the tax return more than 2 years ago. So, late filed tax debts can be discharged.
  5. The tax assessment was more than 240 days ago.
  6. There was no Fraud or Willful Evasion.
  7. 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 don’t blame them. The rules are legalistic and confusing.

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

  1. The taxes are over 3 years old. That means any IRS taxes owed for the year 2016 or before;
  2. You filed the taxes and not the IRS; and
  3. Tax returns for 2015 and before were filed more than 2 years ago.

The following is an example of the most common situation:

Let’s say the date you are meeting with your lawyer and it is after April 15, 2020. You owe $5,000 for your 2016 taxes.

  1. Did you file your income tax return on time?
  2. Or, were they filed late?
  3. Or, did you file for a 6 month extension?

OK. You filed your taxes for 2016 roughly on time in April 2017. The tax due is more than 3 years old and you filed the return more than 2 years ago. Or, you filed or through a tax preparer. The IRS never filed an assessment. You have never entered into a written and signed “offer and compromise” or other agreement.

Can IRS Debt Be Discharged in Chapter 13?

Some clients have to file Chapter 13. Since the IRS debt is dischargeable: the amount to be repaid can be small; maybe 10% or less.

Interest And Penalties

Chapter 7: If the tax will be discharged so will the Interest and Penalties.

Chapter 13: Penalties are general unsecured debt. Thus that part may be repaid at a low dividend (like ten cents on the dollar.) Interest stops in Chapter 13.

IRS Tax Liens and Chapter 7

Even when taxes are discharged it does not eliminate an IRS lien.

  1. Real Estate. An IRS lien has a life of 10 years and can be renewed. If you want to eliminate the lien or deal with see below: IRS Tax liens and Chapter 13.
  2. IRS liens on the personal property don’t pose a problem:
    1. If you move to another county it goes away;
    2. The IRS exempts $6,250 of household furniture and personal effects from levy. (26 U.S. Code 6334). The IRS is not in the business of selling used furniture.

IRS Tax Liens and Chapter 13

The same rules apply. IRS liens can often be avoided in whole or in part depending on the value of the property. If the house is worth less than the mortgage, the IRS lien is not worth anything. The Chapter can get rid of the IRS lien.

For example:

  1. The market value of the home is $200,000; the mortgage balance is more than $200,000 the lien can be avoided.
  2. If there is a tax lien of $50,000 and the value of the home is $200,000 while the mortgage balance is $190,000. Then, what? In Chapter you pay $10,000in full and the remaining $40,000 as a general unsecured debt.

What if The Taxes Are Not Dischargeable? Or, What if The Tax Lien Can’t Be Avoided?

In Chapter 13 the taxes can be repaid over 5 years. And, it puts a halt to further interest and penalties.

Disclaimer: Blogs on legal matters are for information purposes only and is not to be construed as legal advice.

For more information on IRS Debts, call today.

Please see our blog: IRS Tax Liens and Bankruptcy Also learn more about IRS levies, Federal tax liens, Settle IRS tax Debt, How to cut your IRS Debt, IRS Settlement and IRS payment plan.


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