Bankruptcy and the IRS

Information about The Tax Resolution Company

Bankruptcy is often used as a means of getting out from under crushing tax liabilities or to simply stop collection while you get your affairs in order. However, only certain taxes are dischargeable in bankruptcy and then only under certain conditions. Furthermore, some assets protected during bankruptcy (such as your home) may be available to the IRS after the bankruptcy is over.

Only personal income taxes are dischargeable in bankruptcy. Payroll and federal excise taxes are not dischargeable.  In order to be dischargeable, personal income taxes must be:

(1) More than 3 years old. This is based on the due date of the return, including extensions.

(2) If the returns were filed late, they must have been filed for 2 years.

(3) Assessed for more than 240 days. The assessment date is the date the return is due or filed, whichever is later. If you have not filed a return, the taxes are not dischargeable even though the IRS may have assessed tax based on a "substitute for return", which is a return they filed for you based on W-2 and 1099 data.

Generally, any property you have that is either exempt property during the bankruptcy or property abandoned by the trustee will be available to the IRS, if they filed a notice of federal tax lien prior to the filing of bankruptcy. A notice of federal tax lien puts the IRS in a position of a secured creditor, so although your home will be safe during bankruptcy, afterward it will be vulnerable to IRS seizure. If, you have little to no equity, this will not be a problem. However, if you do have equity in your home, bankruptcy may only forestall the inevitable.

If the only reason you are considering bankruptcy is because of federal taxes, you should review the alternatives first. If you are in danger of eminent seizure - contact us. In most cases, we can stop a seizure without bankruptcy.

Follow us on social media: