Can bankruptcy help my IRS problem?

Let me go over the general rules for a bankruptcy that would discharge tax. Now I’m only going to talk about chapter 7 here in this article today. There is five rules.

The first is the 3-year-rule. The 3-year-rule says that the IRS – if the returns that have been due more than 3 years, including the extensions then, they’re going to pass the 3-year rule.

The 2-year rule is the returns must have been filed for at least 2 years if they were filed late. The 240-day-rule stands for the propositions that the taxes must have been assessed more than 240 days ago.

The fourth rule is there could be no willful evasion of tax, which means you cannot have conducted your lifestyle such that you avoided tax or paying your taxes and therefore, you’re going to go ahead and use a tax bankruptcy to get a discharge.

There’s been an increase in the IRS’s willingness to assert that willful evasion in tax bankruptcy cases but this is not your run-of the-mill person who failed to file and then ultimately figured out that the owe six figures or more to the IRS and now they can’t afford to pay and therefore, they go to a bankruptcy. No, this is the type of person who lives large while they’re not paying their taxes and then takes extraordinary efforts to make it so that they hide assets and they co-mingle funds and they just do lots of bad things to keep from paying the IRS. I still would assert that you typical taxpayer is not going to face the challenge from the IRS in a typical tax bankruptcy over willful evasion.

Lastly, the fifth rule is there can be no fraud. So you pretty much know if you’ve committed fraud or not. If you’ve committed fraud, then you’re not going to want to try to take advantage of a tax bankruptcy.

There are some tax lien complications when it comes to bankruptcy and taxes. If there’s no federal tax lien filed, that’s usually a good thing and assuming that you otherwise qualify for a discharge, then you’re going to go ahead and fly through this thing. Now if there is a federal tax lien filed and you own real property, it typically attaches to the property and the bankruptcy doesn’t release it. Now here is the proposition. You get a discharge for your personal responsibility to repay the tax. So if your name is John Smith, they’re not going to come after you John Smith anymore to repay the taxes if you’ve got a bankruptcy discharge. However, if John Smith, you own a house and a tax lien is filed in your county of residence, then that lien is going to attach to your house and by operation of law there’s a legal fiction created that says now your house has the obligation to still satisfy this lien.

Now in years past, the IRS would often ignore this fact and after a bankruptcy, the case would just sort of lost in limbo and the IRS would never come after the lien. That seems to be changing. Now the IRS is sending out rather scary letters saying, okay Mr. Taxpayer who got a discharge, there is a still a lien on your house and you owe us a lot of money, and we will go ahead and we’d like you foreclose on that lien if you don’t pay us. Now I actually haven’t seen that nor have I heard of that actually happening, where they actually foreclose on the lien to take the house, and you never know with politicians how the tides will turn and the winds will change but for now, you need to be aware of the fact that if there’s a federal tax lien and you own real property and the tax lien is filed in the same county as the property, then that creates a significant problem for your tax bankruptcy.

Bankruptcy is highly dependent upon state law. Many states have their own bankruptcy exemptions. So it’s going to be really important that you contact a local bankruptcy attorney to help you out with this, and you need to find somebody that is very skilled in tax discharge ability rules. You don’t want to find someone who is a dabbler, who says that taxes cannot be discharged in bankruptcy under any circumstances. You’ll actually hear that, if you go out shopping bankruptcy attorneys will often say that, and it’s just flat out wrong. So you’re going to want to go ahead and get some high quality bankruptcy counsel to help with you this and you need to go ahead and quiz them if they’ve ever had taxes discharging in bankruptcy. If they cannot give you a categorical answer, yes, these taxes should be discharged in bankruptcy because all the timing rules have been met, then you’re going to want to keep searching.

If you would like to have help in determining the timing rules and whether or not your tax liabilities are dischargeable, feel free to give my office a call, and we could perform that service in conjunction with whatever bankruptcy counsel you hire in your local area.