BANKRUPTCY AND YOUR TAX SLATE – IS IT REALLY WIPED CLEAN?
By: Alena Smith | Posted: 22nd February 2011
When the debt man cometh, he is indiscriminate and will seek to collect various types of liabilities. For some, these liabilities may include an unpaid IRS tax debt. As bankruptcy looms on your financial horizon, you might have already experienced enforced collection activity such as wage garnishment, bank levy, or property seizure. With your back against what seems like an insurmountable wall, you finally acquiesce to the misunderstood reality of bankruptcy and its effect on delinquent income taxes.
BEWARE OF BAD ADVICE
As you consult with attorneys, inform them of the fact that you have IRS tax debt and inquire as to how filing for bankruptcy protection could resolve this dilemma. Beware of bad advice. This may include the common myth that a bankruptcy allows you to wipe the slate clean with all debts save a few (namely student loans and taxes). It may also include a resounding and emphatic yes without a complete understanding of your case.
Is there ever a chance of having your IRS tax debt resolved or eliminated through bankruptcy? The correct answer is yes and is dependent on a specific set of parameters.
WHERE DOES THE BUCK STOP?
Once you have filed your petition with the Bankruptcy Court, you are well on your way towards IRS debt relief . An automatic stay will be issued, which puts a halt to enforcement collection activities from taxing authorities, as well as collection activities in general. However, the buck does not stop here. Eliminating IRS tax debt within a bankruptcy is not this simple. BANKRUPTCY AND YOUR TAX SLATE is a complicated matter that requires the attention of an experienced bankruptcy/tax practitioner. IRS tax debt can be discharged within a bankruptcy based on several factors. For laymen, these factors are laid out in IRS Publication 908 (Bankruptcy Tax Guide). The primary factors include:
1. The chapter of bankruptcy filed (chapters seven, eleven, and thirteen, have different structures and purposes, and all do not afford the discharge of IRS tax debt)
2. The three-year-look back period (was the tax return due, including all extensions, more than three years prior to the filing of the bankruptcy)
3. The two-year filing rule (was the tax return actually filed more than two years prior to the filing of the bankruptcy)
4. The 240-day tax assessment period (was the tax assessed more than 240 days prior to the filing of the bankruptcy)
5. The taxpayer is not guilty of tax fraud or other evasion practices
These timeframes are reviewed independently to determine whether an IRS tax debt is eligible for discharge in a bankruptcy. Further complicating these calculations are Federal tax liens, as well as other events that may extend or suspend the respective time clocks. It is not a simple matter of calendar days, and a miscalculation could have unintended consequences. Proper calculation requires specific knowledge and experience with both bankruptcy and taxation law.
To determine whether your IRS tax debt can be resolved through your bankruptcy case, contact a qualified and reputable bankruptcy/tax professional.
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Tags: several factors, common myth, bad advice, correct answer, student loans, slate, bankruptcy court, debt relief, income taxes, laymen, filing for bankruptcy, bankruptcy protection, tax debt, wage garnishment, irs tax