Bankruptcy is an orderly legal process used by a person who is having trouble paying her bills in order to get relief from her eligible debts by getting a court order to discharge them. Internal Revenue Service tax debts are a big problem to people who owe them, as they carry both penalties and interest. Many IRS tax debts are eligible for discharge in bankruptcy.
Limits to the Automatic Stay
When you file for bankruptcy, the court imposes an automatic stay against collections by your creditors. This means that all of your creditors are barred legally from trying to collect from you. The IRS is included in this stay, and cannot file a tax lien or seize your property while the stay is in effect. The stay does not prevent the IRS from conducting a tax audit or giving you a notice that taxes are due. The IRS can also demand that you file a tax return while the stay is in effect.
Dischargeable Taxes
The dischargeable status of a tax bill depends on a number of factors. The tax return must have been filed at least two years before you filed for bankruptcy and must have been due at least three years before you filed. The tax debt must have been assessed at least 240 days before you filed for bankruptcy, or the debt must not have been assessed yet. If the IRS filed a substitute return for you, it does not count toward the filing dates unless you signed and agreed to the return.
Non-dischargeable Taxes
Tax debt must be from income tax to be dischargeable. Unpaid payroll taxes cannot be discharged. If you filed a tax return fraudulently, the taxes that are due for the period that return covers are not dischargeable. Fraudulent returns include using an incorrect Social Security number, or otherwise trying to evade or avoid paying income taxes. If you had the money available to pay the taxes when they were due, the tax debt is not dischargeable, although the IRS must prove this in court. If you try to hide money by depositing it in someone else's account, and the IRS finds out about this, the IRS can challenge your bankruptcy.
Tax Liens
Once the IRS places a tax lien on your property, the lien cannot be discharged in a bankruptcy. The bankruptcy relieves you of your obligation to pay the bill, but after your bankruptcy is discharged, the IRS can sieze property that they have a lien against and sell it to pay your debt. To avoid this, you may still need to negotiate with the IRS and pay the bill in order to remove the lien from the property.
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