Owe IRS Back Taxes and Can’t Pay?
Many taxpayers, and even many bankruptcy attorneys in Michigan, are not aware that tax debts can be discharged in a bankruptcy. This type of IRS tax debt relief is a legitimate form of debt discharge in U.S. tax law. However, there are very specific timing rules that apply to which tax debts can be written off in the bankruptcy. Filing your bankruptcy a day early could be the difference between whether or not the tax debt is written off. It is essential that you have a professional review each of your tax balances to determine their bankruptcy eligibility.
Austin & Larson Tax Resolution, in Howell, MI, Jackson, MI, and Saginaw, MI, can help you on the road to IRS tax debt forgiveness in determining if bankruptcy can settle your debt. Call us now at 1-866-668-2953 for immediate tax debt settlement help that you can trust. Our Michigan IRS resolution service has Enrolled Agents, Tax Attorneys, CPAs, and Accountants on staff can get you on the road to a fresh start.
The IRS Insolvency Department handles bankruptcy discharges. Once a taxpayer’s bankruptcy is complete, this department is notified. The IRS will then discharge all eligible taxes, interest, and penalties, usually within 30-60 days. Any eligible Federal tax liens will also be discharged. The IRS does make mistakes when it comes to properly discharging eligible taxes. It is important to monitor that the IRS properly discharges all of your eligible taxes. It may require follow-up with this department to make sure that your IRS back tax balances are properly addressed.
Chapter 7 Versus Chapter 13 Bankruptcy in IRS Tax Filings
There are two main types of bankruptcy for an individual: A Chapter 7 bankruptcy and a Chapter 13 bankruptcy. A Chapter 7 bankruptcy is a total liquidation, whereas a Chapter 13 bankruptcy is a reorganization.
In a Chapter 7 bankruptcy, all non-priority tax debts can be discharged and settled. Non-priority debts include items such as credit card debt, property and mortgages, and loans. They also include some types of tax debt. In a Chapter 7 bankruptcy, a debtor can protect some of their assets up to certain exemption amounts. A Chapter 7 bankruptcy usually takes a few months from filing to discharge.
Unlike a Chapter 7 bankruptcy, a Chapter 13 bankruptcy is a much longer and more complicated process when it comes to IRS tax debt settlement. It can take several years. In a Chapter 13 bankruptcy, the debtor submits a budget to the bankruptcy court. This budget must pay back the debtor’s priority debt and necessary living expenses. Any excess money is paid to non-priority creditors. Any non-priority debt that is not paid through the bankruptcy is discharged.
There are certain income thresholds that must be met in order for a debtor to qualify for a Chapter 7 bankruptcy. While there are exceptions to the income thresholds, generally this is what will determine if a taxpayer qualifies for a Chapter 7 bankruptcy.
Rules for Dischargeability of Federal Taxes
There are many rules that come in to play to determine if Federal income tax balances are dischargeable in bankruptcy. Below are some of the main ones that determine whether a balance can be discharged in bankruptcy:
- 3 Years After Due Date
- 2 Years After Filing
- 240 Day Rule
Bankruptcy dischargeability looks at the later of the three dates above. If a return was filed on time, with no additional assessments, then 3 years after the due date is likely the date that the taxes would be eligible for bankruptcy. However, if the return was filed late, or if there was an additional assessment of tax on the year, then one the 2 year rule or the 240 day rule may determine the eligible discharge date for the tax debt.
Bankruptcy eligibility is tax year specific. Each year has to be analyzed to determine its own individual discharge date. Some years of tax debt may be eligible for discharge, while others are not. Depending on how the returns were filed, they may all have the same discharge date, or they may all have different dates.
However, there are other IRS tolling events that may affect the date that taxes are eligible for discharge. These tolling events add additional time to the discharge dates of the back taxes.
Type of Taxes Eligible for Bankruptcy Discharge
Not all taxes are eligible for bankruptcy discharge in the eyes of the IRS. Individual income taxes are eligible for bankruptcy discharge in most situations so long as the time guidelines have passed. However, if the taxpayer did not file their own return, then the balances may not be eligible for a bankruptcy discharge. If the IRS files a Substitute for Return (SFR) for a taxpayer, then that balance is generally not eligible for a bankruptcy discharge, even if the taxpayer later files a return to replace the SFR. However, a bankruptcy still may discharge some of the interest and penalties.
Payroll taxes and IRS civil penalties are also not eligible for bankruptcy. Unlike individual income taxes, bankruptcy will not discharge these taxes, regardless of how old they are. These taxes can be resolved through other debt resolution programs, but not through bankruptcy.
Is Bankruptcy Right For You to Stop IRS Garnishment and Levies?
For some, bankruptcy can be a very effective way to eliminate IRS tax debt that they are unable to pay. It also can eliminate your back tax liabilities. However, there are also downsides to filing a bankruptcy. One of the largest downsides being the effect that it has on your credit score.
If you are considering filing bankruptcy, contact the tax debt professionals at Austin & Larson Tax Resolution. We can review your IRS transcripts to help you determine which of your tax balances are dischargeable. We can also monitor after the bankruptcy to confirm that the IRS properly discharges your balances. We can also discuss alternative debt resolution options with you to make sure that bankruptcy is the correct resolution option to resolve your tax debt.
Are you ready to take the next step? Call us at 1-866-668-2953 or please fill-out the right side form describing how we can help you toward a tax relief solution. We work with taxpayers throughout Michigan and would be glad to discuss your back tax debt bankruptcy options. Our services start with a free, no-obligation consultation about your tax problems. Serving Michigan taxpayers with professional IRS tax debt relief and negotiation services – that’s Austin & Larson Tax Resolution.