Discharging IRS Tax Debt Via Bankruptcy

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.

IRS Collection Statute of Limitations

Where IRS problem cases are a concern, there’s such a thing known as the Collection Statute of Limitations. This refers to the 10-year period in which the IRS can legally collect back taxes. This begins to run 10 years from the date of your assessment. However, there is the possibility that you may have different assessment dates. There are a number of things, like tolling factors, that can stop the collection statutes from running their course.

One such example of a tolling factor would be an Offer in Compromise or a Collection Due Process hearing. There are other factors as well. Depending on the various actions, statutes can remain open for as long as 30 years; extending a person’s obligations to pay their taxes. There are solutions to your tax problems, but it’s next to impossible for the average person to navigate the IRS system alone.

The bottom line is that your tax problems don’t have to be a lifetime sentence. There’s an end in sight to the nightmare that you might be experiencing. However, the light at the end of the tunnel is hard to find or experience without the right kind of professional assistance. Your best source of help is a qualified tax attorney who can help guide your through the pitfalls.

Is it Possible to Settle for Less with the IRS?

If you’re way in over your head in monies owed to the IRS and there appears to be no light at the end of the tunnel, there’s hope. An offer in compromise allows you to settle your tax debt for a less than the full amount owed. For anyone who finds it difficult to pay their full tax liability, this offer can lift them out of financial hardship. The IRS knows everyone has a unique set of circumstances, but will generally look at your ability to pay, income, personal expenses and the equity in your assets.

Not everyone is eligible to make an offer in compromise. If you’re in an open bankruptcy proceeding you may not qualify. However, if you’re current will all payment and filing requirements, you could be placed on the eligibility list. Without the help of a qualified attorney, it’s difficult to know the scope of what’s possible or not. If you’re out of a job or underemployed, investing money and time with an IRS tax attorney can be well worth it in the long run. In today’s economic climate, it’s a lot easier to make an offer of compromise. Your tax attorney can help you make the case for what you can or cannot pay.

IRS Tax Solutions Through Bankruptcy

If you’re a business owner or an individual with tax problems, there are three options that allow you to file bankruptcy so as to deal with your IRS tax problems. Chapter 7 is much more of a liquidation process that completely removes your debt from the books. Chapter 13 allows you to set up a repayment schedule to offset your debts. Repayment of your debt can be negotiated over a 60-month period. Chapter 11s are typically thought of as a business bankruptcy. They’re useful in helping business deal with payroll taxes.

If your taxes have been filed late, they at least must have been filed for at least two years. Tax assessments have to at least been filed for at least 240 days. These timing rules apply both to Chapter 11 and Chapter 13. Taxes, under certain circumstances, can be discharged through bankruptcy. If you’re a business owner facing the heat of the IRS, you need the help of a professional who deals with these things for a living. The issues can be complicated as there are 600-page books on the matter. If you do have a tax liability, the issues are simply too complex to go it alone.

Worried About The Money You Owe The IRS?

Many people have difficulty paying their taxes for various reasons. Typically, back taxes become a problem when people suffer sudden health issues, job loss or other life events that interfere with their having enough time to file their tax forms and/or enough money to pay all or part of their tax obligations.

I created a video to help provide both personal and business taxpayers answers to questions taxpayers typically have about tackling their back taxes. Specifically, I cover six common options, a mix of repayment and discharge plans, available to taxpayers who need assistance: offer in compromise, installment agreement, collection statute of limitations, hardship status, bankruptcy and innocent spouse relief.

This video is a little over four minutes in length, but it is not complex. I have used layman’s terms to give viewers the ability to quickly learn the basics about these options so they are better prepared to make informed decisions when dealing with the IRS and/or speaking with a tax attorney.