Discharging IRS Tax Debt in Bankruptcy

A common question from individuals considering bankruptcy is whether they can get rid of their IRS tax debt. Under certain situations, taxes are dischargeable in bankruptcy.  In order to discharge a tax debt in bankruptcy, you must meet a number of conditions:

  1. (1) The taxes must be income taxes
  2. (2) You didn’t previously commit fraud on a tax return or willfully evade paying taxes
  3. (3) The tax debt is over three years old before you filed bankruptcy
  4. (4) You filed tax returns for the debt you wish to discharge at least two years prior to filing bankruptcy
  5. (5) The tax debt must have been assessed by the IRS at least 240 days before filing bankruptcy.

Three Year Rule

At least three years must pass between the filing date of your bankruptcy petition and the date the income tax return was last due. This includes extensions that may have delayed the filing date.

For example, taxes from the 2008 tax year can’t be discharged in bankruptcy until after April 16th of 2012 (as long as there weren’t any extensions that pushed the due date back).

Two Year Rule

Even though the taxes were due more than three years ago the tax debt can’t be discharged in Chapter 7 bankruptcy unless the taxpayer actually filed a return more than two years before the bankruptcy filing date. Returns filed by the IRS doesn’t count as a filing since it wasn’t done by the taxpayer.

240 Day Assessment Rule

At least 240 days before the filing of a bankruptcy petition, the taxing authority must have assessed the tax. Offers in compromise, for example, extends the the period while pending and adds another 30 days. This rule is usually only a concern if the IRS audits a prior tax return and decides additional taxes should be assessed.

Taxes Not Dischargeable through a Chapter 13 Payment Plan

In a Chapter 13, income tax debt is not dischargeable, but may be paid at 0% interest in a Chapter 13 payment plan.  This is a lesser interest rate than payment plans through the IRS. By taking your total amount of income tax debt and dividing it over a five year plan, your monthly payments can be significantly reduced.

This will stop collection efforts and give you a chance to breathe. The penalties and post-petition interest that you’d normally pay on those taxes won’t be paid through the Chapter 13 plan because they’re considered unsecured debt.

Stopping IRS collection

Filing a bankruptcy will generate the automatic stay immediately putting a stop to IRS attempts to collect past due tax debt. These collection efforts include garnishments and levies on your paycheck and the perfection of tax liens. The stay remains in place through a Chapter 7 discharge or the entirety of a Chapter 13 plan.

It’s also important to remember that timing is important. We hate to see clients that waited too long and let some options expire. There are also times that it helps to wait until April 15th. We can go over all these situations with you.

If you have accrued a large amount of IRS tax debt, we may be able discharge that debt and stop collection efforts.  Call our office today at 248.237.7979 to schedule a FREE CONSULTATION .