Can Bankruptcy Eliminate or Reduce IRS Debts?

Bankruptcy and the IRS

Radha Rothrock is a tax attorney and bankruptcy attorney in Fort Myers, Florida.  Bankruptcy is one of the most useful tools to manage your IRS debt.  In bankruptcy, your tax debts can be treated as “secured debts,” “priority debts” or “general unsecured debts.”  General unsecured debts are treated like any other general unsecured debt in bankruptcy, such as medical bills and credit cards.  In most cases, you do not have to pay back the debt at all.  In some cases, you might have to repay a small portion.

The General Rules:  Will Bankruptcy Eliminate my Tax Debt?

In order to be treated as “general unsecured debts,” the following rules apply: 1.  Your tax debt must have been assessed at least three years ago.  For example, tax return 2010 typically would not be due until April of 2011.  In that case, your three years runs April 16,  2014.  Keep in mind the three years runs on April 16, not the day you actually filed the return.  If the deadline to file a return is April 16 or 17 because April 15 falls on a weekend, the three years runs on April 17 or 18.  If  you asked for an extension and the return was due October 15, the three years would not run until October 16, 2014. 2.  You must have filed your tax returns the last two years. 3.  Your tax returns must have been truthful and not fraudulent. 4.  You must not have intended to evade paying your taxes. 5.  The tax you owe must have been assessed against you by the government for at least 240 days before the bankruptcy case is filed.

Exceptions to the General Rules

Some conditions cause the three year time and the 240 day time period to “toll.”  In other words, if you take certain actions, you could extend the three years.  Events include the following: 1.  If you have a prior bankruptcy case, the three year/240 day time periods are tolled during the period of bankruptcy plus 90 days. 2.  If you requested a hearing or filed an appeal for a collection action, the three year/240 day time periods are tolled during the period of the appeal plus 90 days. 3.  If you filed an offer in compromise, the 240 day period is suspended during the period the offer is pending plus an additional 30 days. 4.  If the IRS assesses taxes and the taxpayer files a lawsuit in Tax Court and subsequently loses, the 240 days will not start to run until after the lawsuit is over.

Using Chapter 13 to Repay the IRS that cannot be discharged in bankruptcy

As stated above, some of your IRS debts are classified as “priority debts,” namely the IRS debts that are less than three years old or the debts that otherwise could not be discharged in the bankruptcy.  Chapter 13 makes the repayment of those priority debts much more manageable than a traditional installment agreement with the IRS.  The rules for repayment of priority tax debt through a Chapter 13 Plan are as follows: 1.   IRS collection efforts will be suspended while you are undergoing your chapter 13 plan. 2.  Penalties and interest will stop accruing during the period of time you are in your chapter 13 plan. 3.  Penalties and interest that were assessed before you filed bankruptcy will be treated as general unsecured debt as opposed to priority debt.  In other words, there is a good chance you will not have to repay any of that debt.

Examples

You owe the IRS.  Today is 2013.  You owed the IRS $10,000 in 2004.  The IRS did not place a lien.  You owe the IRS $1,000 for tax year 2005, and the IRS placed a lien on your property.  You owed the IRS $8,000 in 2010.  Of that $8,000, $4,000 was for taxes and $4,000 was for penalties and interest.  The IRS did not place a lien.  You owe $20,000 in credit card debt.  After subtracting your expenses from your income, you have $100 left in disposable income.  Under the means test calculations, you are eligible to file chapter 13 for 36 to 60 months. In this case, the $10,000 owed for tax year 2004 is treated as general unsecured debt.  The $4,000 of penalties and interest in 2010 is treated as general unsecured debt.  The $20,000 credit card debt is treated as general unsecured debt.  The $1,000 of IRS debt in 2005 is treated as secured debt.  The $4,000 of taxes for 2010 is treated as priority debt because the tax return for tax year 2010 would have been filed in 2011.  The three year assessment period for priority debt will not run until 2014.  In this example you would repay the $4,000 of priority debt for tax year 2010 at $100 per month for 40 months.  You would pay the 2005 secured debt at $100 per month for 10 to 11 months because the secured debt would be entitled to interest on top of the debt.  Your total plan would be for 50 to 51 months.  You would not have to pay the credit card debt, the 2004 tax debt, or the 2010 penalties and interest.

To schedule a free consultation today, call the Rothrock Law Firm today at 239-206-1948

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