One of the most frequently asked questions we answer is whether IRS liabilities can be discharged in bankruptcy. A popular misconception is that taxes are not dischargeable in bankruptcy. In fact, they are sometimes dischargeable, but there are complicated rules governing this area. Our board certified bankruptcy law specialist, attorney Nicholas Gebelt, can determine whether bankruptcy tax relief is available to you.
Discharging taxes in Chapter 7 bankruptcy
For IRS liability to be dischargeable in Chapter 7 of the Bankruptcy Code, it must meet three requirements:
- The relevant return must have been must have been due, at least three years before the day you file for bankruptcy. For example, the return for the year 2012 was due on April 15, 2013. Therefore, to satisfy this first requirement, don’t file for bankruptcy before April 16, 2016. This is assuming that the individual or the individual’s representative did not request an extension for filing the return. The three-year period is extended if a request for an extension was made.
- The individual filed the return at least two years before filing for bankruptcy. A Substitute for Return filed by the IRS does not qualify as a return for purposes of this section. The person must have actually filed a return. And a return filed after an SFR is not a return for bankruptcy discharge purposes.
- The liability must have been assessed at least 240 days prior to filing.
- The return must not have been fraudulent.
Even if the taxes are not dischargeable, an Offer in Compromise combined with a bankruptcy may provide the best relief for a person with debt and IRS problems. Call us to discuss how filing for Chapter 7 bankruptcy may affect your tax liability.
Discharging taxes in Chapter 13 bankruptcy
Chapter 13 offers more flexibility than Chapter 7. In many cases, Chapter 13 allows interest to be frozen and penalties to be abated.
When can businesses discharge tax liability through bankruptcy?
Some of the same rules that apply to individuals also apply to businesses. IRS liabilities are often a considerable challenge to business owners who have not paid employment liabilities, as payroll withholding taxes cannot be discharged in bankruptcy.
Payroll withholding taxes may, however, be paid through a Chapter 11 plan. The non-dischargeable portion of the liability can be paid within five years in Chapter 11. Many times, filing a petition for relief in bankruptcy court enables a business to survive and successfully reorganize its debts and IRS liabilities.
There are many exceptions to the discharge rules in bankruptcy. A careful analysis is necessary to avoid pitfalls. We can provide an honest assessment of whether you may qualify for relief.
Offers in Compromise
Did you know that you can settle your debt with the IRS for a small fraction of what you owe with their Offers in Compromise program?
If you qualify, an Offer in Compromise is an excellent option for settling your tax debt for less than the full amount that you owe. This solution is particularly helpful for those who are unable to pay the full amount owed to the IRS in the time required. The IRS evaluates all Offer in Compromise applications and takes into account the following circumstances that may apply:
- Tax payer’s ability to pay the debt
- Annual income
- General expenses
- Asset equity
The IRS realizes that settling for a lower amount is a better option for them than not receiving any payment at all. Even if you have not yet been contacted by the IRS about your mounting debt, make no mistake–the IRS will eventually collect the debt. There are many ways that they can do this, including levying funds from your bank account and putting a lien on your car, house, or other property. Instead of letting your home become subject to IRS seizure, get ahead of the IRS and negotiate your bill down through the Offer in Compromise program.
An Offer in Compromise is often viewed as a last resort effort to resolve tax debt, but it may very well be the answer that you have been looking for to solve all of your tax problems. It is important to know that the application process and follow up with the IRS can be complicated and time-consuming. To have the very best chance for success, you need an experienced tax relief firm to determine if you are eligible for this program and then help you navigate this complex process.
IRS Installment Agreements
If you don’t qualify for the IRS Officer in Compromise program, an installment agreement payment plan may be the best way to resolve your problem.
Did you know that the IRS is often willing to set up an installment plan for you to pay your back taxes and penalties? This can resolve all of your IRS problems. In certain circumstances, the IRS will allow you to make monthly payments through an installment plan, if you cannot afford to pay the full debt all at one time.
The first step is to file all of your past tax returns before you request an installment payment plan. This is not always easy and often requires a fair amount of time and patience, but the IRS requires it before an installment plan can be established. Once all of your filings are current, we will submit your installment agreement application to the IRS.
The IRS will review your application to determine how much money you can afford to pay each month, based on your income and expenses. The Service will also specify the time period in which you will pay the debt. This step takes you out of the dreaded “collections” category. You will immediately see a stop to the IRS harassment. Paying your installment on time each month will prevent the IRS from levying your bank account, garnishing your income, or putting a lien on your property.
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