Robert J. Adams and Associates
Can I Discharge Taxes in Bankruptcy?
IRS debts can often be discharged in a Chapter 7.
IRS debts in a Chapter 13 can often be paid a dividend of less than 100%
The following set out the rules to discharge an IRS debt in Bankruptcy
- 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.
- The tax is for income-an income tax. You cannot discharge payroll taxes or if fraud is involved.
- The tax debt is at least 3 years old. Generally, the due date is April 15th. .If you have filed for an extension of the filing date, the due date is October 15th, or the 16th.
- The tax return was filed at least 2 years ago. So, late-filed tax debts can be discharge.
- The tax assessment was more than 240 days ago.
- There was no Fraud or Willful Evasion.
- There has been a “tolling.” Written agreements with the IRS and a prior filing in Bankruptcy can toll the above time period to make otherwise dischargeable taxes into non-dischargeable taxes.
When I explain the above-mentioned rules to clients they frequently 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 is really only 3 rules that apply:
- The taxes are over 3 years old. That means any IRS taxes owed before 2017;
- You filed the taxes and not the IRS; and
- Tax returns for 2016 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 is on or after April 16, 2021. You owe $5,000 for your 2017 taxes. Issues to be determined: Did you file your income tax return on time? Or, were they filed late? Or, did you file for a 6-month extension?
OK. You filed your taxes for 2015 roughly on time in April 2016. The tax due is more than 3 years old and you filed the return more than 2 years ago. And, of course, you filed honestly, maybe 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.
If you choose to file a Chapter 13 the IRS debt for 2015 is a general unsecured debt that can possibly be paid a low dividend depending on your income. The older taxes are also discharged using the same criteria.
INTEREST AND PENALTIES
Chapter 7: If the tax will be discharged so will the Interest and Penalties.
Chapter 13: Penalties will be treated as a general unsecured debt. Thus that portion may be repaid at a low dividend (like ten cents on the dollar.) Interest stops coming due once a Chapter 13 is filed.
IRS TAX LIENS AND CHAPTER 7
If the IRS has filed a lien on your personal property and/or real estate, you have a problem. Even if the debt is dischargeable the lien remains. As to personal property that usually does not pose a problem; the IRS is not going to after your furniture. But if you own a home and you want to keep it then it is a real problem. IRS liens have a life of 10 years and the lien can be renewed. Most liens go through Chapter 7 unaffected so even at the end of your Chapter 7 case, the lien would still have to be addressed.
IRS TAX LIENS AND CHAPTER 13
The same rules apply. However, 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 is owed on the mortgage, the IRS lien is not worth anything. The Chapter 13 Plan can then be used to get rid of the IRS lien.
For example, If the market value of the home is $200,000 and the mortgage (s) balance and real estate taxes are more than $200,000 the lien can be avoided in its entirety. Assume, however, there is a tax lien of $50,000 (and the taxes are dischargeable) and the value of the home is $200,000 while the mortgage and real estate tax balance is $190,000. Then, what? A Chapter 13 can be constructed to pay $10,000 of the tax lien in full and the remaining $40,000 as a general unsecured debt repaying, hopefully, a very low dividend.
Another advantage to a Chapter 13 is when there are non-dischargeable tax debts and/or tax liens that cannot be avoided: you can repay the IRS debts over a period of up to 5 years and put a halt to the interest and penalties.
Please see our blog: IRS Tax Liens and Bankruptcy