IRS Tax Debt Forgiveness in Bankruptcy Cases
Most unsecured debts are dischargeable in bankruptcy, but taxes owed to the Internal Revenue Service (IRS) are usually not dischargeable in bankruptcy except in certain circumstances. Therefore, some individuals turn to debt relief programs for IRS tax debt help. However, filing bankruptcy can offer tax debt relief for some individuals and may be preferable to IRS tax relief programs.
Our Dallas-Ft. Worth bankruptcy attorneys offer free consultations to discuss IRS tax relief and tax debt forgiveness. Filing a bankruptcy case may offer you the IRS debt relief you need to get your finances back on track after a financial crisis.
Filing Bankruptcy Stops IRS Collection Efforts
When you file a bankruptcy petition, the automatic stay provisions of the Bankruptcy Code protect you from collection efforts by creditors, including the IRS. The automatic stay is very important because it prevents the IRS from issuing a tax lien, garnishing your wages, or seizing the funds in your bank accounts.
In addition, if your tax debt meets certain criteria, you may be eligible for a discharge of your tax debt.
Below are the criteria you must meet for IRS tax debt forgiveness through a bankruptcy filing:
- The debt you owe to the IRS is for income taxes.
- You did not willfully evade paying taxes or commit tax fraud.
- The due date for the taxes you owe must be at least three years before the filing of your bankruptcy petition to qualify for IRS debt relief in bankruptcy.
- The tax returns that resulted in the tax debt were filed at least two years before filing your bankruptcy petition.
- For IRS debt forgiveness through a bankruptcy filing, the IRS must have assessed the tax debt at least 240 days before you filed your bankruptcy petition.
The above set of criteria is often referred to as the “3-2-240 Rule.” If all the elements of the 3-2-240 Rule are met, you may be eligible for tax relief help by filing a Chapter 7 or Chapter 13 bankruptcy case.
IRS Tax Debt Relief in Chapter 7 Bankruptcy
While Chapter 7 is not a tax relief program, you can obtain tax debt relief if your income taxes qualify for discharge. If your taxes are dischargeable in Chapter 7, you will not be required to pay any of the income taxes you owe.
However, you cannot discharge a tax lien in a Chapter 7 case. You may discharge your personal liability for the tax debt subject to the tax lien, but a filed tax lien will remain in force. If you own real estate, you must pay the lien when you sell the property if the lien is still in force and effect.
IRS Tax Debt and Chapter 13
In a Chapter 13 case, taxes that meet the above criteria are treated as unsecured debts in your bankruptcy case. The IRS receives the same percentage of its debt that your other unsecured creditors, such as medical bills and credit card debts, receive through your Chapter 13 plan.
If your income tax debt does not meet the above criteria, you must pay the taxes in full through the bankruptcy plan. However, instead of a lump sum, you can spread out the debt over the term of the bankruptcy plan.
IRS Debt Relief Programs and Tax Debt Assistance Program
If a bankruptcy filing is not the best option for you to resolve your tax debt and other debts, you may apply for an IRS debt relief program, such as an Offer in Compromise. However, the paperwork to apply for IRS tax relief programs can be overwhelming, especially if you attempt to go through the process without an attorney.
Furthermore, meeting the qualification for an IRS forgiveness program and other tax debt relief programs can be difficult. In some cases, you may need to file a bankruptcy case to stop an IRS tax lien from being filed. In addition, the periodic payments in a tax debt forgiveness program may be more expensive than the plan payment in a Chapter 13 case.
Therefore, before you apply for IRS tax relief programs, you should consult a Texas bankruptcy lawyer. In some cases, it could be less costly to file a Chapter 7 or Chapter 13 case than it is to settle your debt directly with the Internal Revenue Service. Our attorneys will review all your options, including bankruptcy and tax debt relief programs to determine the best option for you given the totality of your financial circumstances.
Call Our Texas Bankruptcy Law Firm for a Free Appointment
The bankruptcy attorneys of Leinart Law Firm want to help you get rid of tax debt while resolving other financial problems. It is our goal to help you find an affordable solution for debts that you cannot afford to pay.
Call our office at (469) 232-3328 or (817) 426-3328 to request a free bankruptcy consultation with a Texas bankruptcy lawyer.