Hi, today we have an interesting question about discharging taxes through a bankruptcy, and the question goes like this: I want to file a chapter 7, I’m certain the IRS debt will be discharged, but how can I get the lien lifted?
My name is Darrin Mish I’m an IRS lawyer from Tampa, Florida and we also do bankruptcies for taxes.
We deal with this issue quite a bit, the questioner has further facts that I’m going to list here:
Since I have an IRS lien that is attached to a house underwater that the bank is taking in a couple of months after foreclosure judgement. I do not have any assets of value, so the IRS will not receive any compensation in a chapter 7 bankruptcy, I’m 100% sure the old taxes will be discharged in bankruptcy, will the lien will automatically be lifted upon discharged if not, what do i have to do to get the lien lifted and can the lien be applied to newly acquired future property after bankruptcy even though what I owe the IRS was discharged in the bankruptcy?
That is really a fact specific question, but I’m going to go ahead and do my best to give you a good answer. So, before we can talk about the lien, I think we should talk about the discharge ability rules, and timely discharge ability rules and bankruptcy.
So there’s three basic rules, the first is the returns have to been due for at least three years including extensions. So remember tax returns are due April 15th the year following the tax year in question.
So for 2013 tax return, they are going to be due on April 15th, sometimes 16th or 17th of 2014. Now if there were extensions, the automatic extension nowadays is October 15th, sometimes 16th or 17th depending on if it falls on the weekend. And so then you will have to wait three years from the extension date to meet this time rule if you filed an extension, even if you filed before the extension was up.
The second rule is there you have to had filed the returns if filed late for at least two years. Now that’s the law in most jurisdictions, now there is a case out there called a McCoy that is really super poorly reasoned, that stands for the proposition that if you filed the return late at all, then it’s not a tax return and it can never be discharged in a bankruptcy, fortunately in Florida, in the middle district of Florida, we don’t have that problem yet. The McCoy case is primarily out of it’s circuit, and people in it’s circuit know that they just have to deal with it. I think that the McCoy case will eventually be overturned because the case actually disagrees with the statute. And that isn’t usually the way the law works out, in the McCoy case the court didn’t really want a discharged to happen for this particular taxpayer and so they reasoned in that faction.
Now the third timing rule is actually the taxes would have to been assessed for at least 240 days. And that’s only 8 months or so and that’s not usually the timing rule that people have the most time with or trouble with.
So let’s get back to this particular question, he says he is 100% sure the old taxes will be discharged in the bankruptcy, will the lien be automatically be lifted upon discharged?
Probably not, your bankruptcy attorney probably will need to make a phone call and talk to the lien desk or the bankruptcy insolvency unit in your particular district and bring this to their attention, and the IRS employees there will most likely go ahead a lift the lien.
The basic rule is if there is no equity in that house at the time of the filing of the petition then the tax link is not attached to the post-petition equity that may accrue in that asset.
So in English, what the means is that if you filed a petition and there was no equity, and theoretically six months later there was another real estate bin and you have $100,000 equity, the lien doesn’t attach to that post-petition equity.
So you are going to get off there most likely. I’m not going to go ahead and address what’s going to happen in the foreclosure judgement, that is a totally different issue and to answer your question, no the lien does not apply to after-acquired property.
Since there was no assets and no equity in the house, you’ll probably get that lien released, you just have to have your bankruptcy attorney call insolvency unit, the bankruptcy unit in your district and probably get it taken care of.