File For Bankruptcy And IRS Tax Debt Forgiveness In Ann Arbor, MI

Austin & Larson – Tax Debt Forgiveness, Tax Settlement, and Tax Discharge

Austin & Larson Tax Resolution is a tax resolution firm in Ann Arbor, MI that helps individuals and business owners determine whether their IRS tax debt can be discharged through bankruptcy.

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Can IRS Tax Debt Be Discharged Through Bankruptcy?

Yes. Many taxpayers, and even some bankruptcy attorneys in Michigan, do not realize that certain IRS tax debts can be legally eliminated through bankruptcy. This is a legitimate form of debt discharge under federal law. However, very specific timing rules determine which tax debts qualify, and filing even one day too early can mean the difference between discharge and denial.

Not all tax debt is eligible. Individual federal income taxes can be discharged if they meet three timing requirements. But payroll taxes, IRS civil penalties related to fraud, and taxes where the IRS filed a Substitute for Return on your behalf generally cannot be eliminated through bankruptcy. The rules are precise, and getting them wrong is costly.

That is why Austin & Larson Tax Resolution reviews your complete IRS transcript history before you file. Bridgette Austin, JD, EA, and our team analyze each tax year individually because bankruptcy eligibility is determined year by year, not as a lump sum. Some years may qualify for full discharge while others do not.

How Bankruptcy Protects You Immediately

The moment a bankruptcy case is filed with the court, an automatic stay goes into effect. This legal protection immediately stops all IRS collection activity against you, including wage garnishments, bank account levies, and property seizures.

The automatic stay gives you breathing room to work through the bankruptcy process without the IRS taking money from your paycheck or draining your bank account. For many Ann Arbor taxpayers who are already under active IRS collection, this immediate relief is one of the most important benefits of filing bankruptcy. The stay remains in effect throughout your bankruptcy case until the court issues a discharge or the case is closed.

Chapter 7 Versus Chapter 13 Bankruptcy for IRS Tax Debt

There are two main types of personal bankruptcy, and each handles IRS tax debt differently. Chapter 7 can eliminate qualifying tax debt entirely within a few months. Chapter 13 reorganizes your tax debt into a 3-to-5 year repayment plan. Austin & Larson Tax Resolution helps you understand which chapter gives you the best result based on your specific tax situation.

Chapter 7 Bankruptcy and Tax Debt

A Chapter 7 bankruptcy is a total liquidation. All non-priority debts can be discharged and settled. Non-priority debts include credit card balances, medical bills, personal loans, and certain types of tax debt that meet the timing rules explained below.

In a Chapter 7 filing, you can protect some of your assets up to Michigan’s exemption amounts. The process typically takes a few months from filing to discharge. If your IRS tax debt qualifies, it is completely eliminated. You will owe nothing more on those tax years.

There are income thresholds you must meet to qualify for Chapter 7. A means test compares your income to the median income in Michigan. If your income is below the median, you generally qualify. Exceptions exist for higher earners who can demonstrate that their disposable income is insufficient to fund a repayment plan.

Chapter 13 Bankruptcy and Tax Debt

A Chapter 13 bankruptcy is a reorganization rather than a liquidation. It takes much longer, typically three to five years. In a Chapter 13, you submit a budget to the bankruptcy court that accounts for your priority debts, necessary living expenses, and payments to creditors.

IRS tax debt that does not meet the timing rules for discharge is classified as priority debt. Priority tax debt must be paid in full through your Chapter 13 plan. However, tax debt that does meet the timing rules is treated as non-priority unsecured debt and receives the lowest repayment priority. Any non-priority debt not fully paid through your plan is discharged when your case closes.

Chapter 13 can be useful when some of your tax years qualify for discharge and others do not. It lets you reorganize the non-dischargeable years into affordable payments while eliminating the older qualifying debt.

Rules for Discharging Federal Tax Debt in Bankruptcy

Three federal timing rules determine whether a specific tax year qualifies for bankruptcy discharge. All three must be satisfied. Austin & Larson Tax Resolution analyzes your IRS transcripts to calculate the exact dates for each tax year, because bankruptcy eligibility is year-specific and each year may have a different discharge date.

The 3-Year Rule

The tax return for the year in question must have been due at least three years before you file for bankruptcy. This is based on the original due date, including any extensions you filed.

Example: You owe income taxes for the 2022 tax year. Your return was due April 15, 2023 (assuming no extension). You must wait until at least April 16, 2026 to file bankruptcy and discharge that debt. If you filed a six-month extension, the due date shifts to October 15, 2023, and you would need to wait until October 16, 2026.

The 2-Year Rule

You must have actually filed the tax return at least two years before filing for bankruptcy. This rule matters most for taxpayers who filed their returns late.

Example: Your 2021 tax return was due in April 2022, but you did not file it until March 2024. Even though the 3-year rule may be satisfied based on the original due date, the 2-year rule means you cannot file bankruptcy to discharge that debt until at least March 2026.

A critical point: if the IRS filed a Substitute for Return (SFR) on your behalf, that does not count as your return. You must have personally filed a tax return for the 2-year clock to start. If only an SFR exists, the balance is generally not eligible for discharge.

The 240-Day Rule

The IRS must have assessed the tax at least 240 days before you file for bankruptcy. An assessment is the IRS’s official recording of the amount you owe.

In most cases where you filed your return on time and there were no additional adjustments, the assessment date is close to your filing date. But if the IRS audited you or made changes to your return, the assessment date could be much later, which pushes back your eligibility.

Bankruptcy eligibility looks at the latest of these three dates. Filing even one day too early can disqualify a tax year from discharge. Austin & Larson Tax Resolution pulls your IRS Account Transcripts, which show the exact assessment date, filing date, and return due date for every tax year. This is the only way to calculate discharge dates accurately.

Which Taxes Cannot Be Discharged in Bankruptcy

Not all IRS tax obligations are eligible for discharge. Knowing which debts bankruptcy can and cannot eliminate is essential before you file. Austin & Larson Tax Resolution reviews your complete tax history so you understand exactly what to expect.

Individual federal income taxes are eligible for discharge if all three timing rules are met and you filed your own return honestly.
Taxes where the IRS filed a Substitute for Return (SFR) are generally not dischargeable, even if you later file a return to replace the SFR. Some courts have allowed discharge in limited situations, but this is not something you should count on.
Payroll taxes and trust fund taxes cannot be discharged regardless of their age. If you are a business owner who owes payroll taxes, those balances will survive bankruptcy. They can be resolved through other IRS programs, but not through Chapter 7 or Chapter 13.
IRS civil fraud penalties are not dischargeable. If the IRS determined that you committed fraud on a return, the penalties attached to that year will not be eliminated.
Interest and penalties on eligible tax years may be partially or fully dischargeable if the underlying tax qualifies. However, the rules are complex and vary by case.

What Happens After Bankruptcy: The IRS Insolvency Department

After your bankruptcy is complete, the IRS Insolvency Department is responsible for processing the discharge. This department removes eligible taxes, interest, and penalties from your account, typically within 30 to 60 days. Eligible federal tax liens can also be released. Austin & Larson Tax Resolution monitors this process on your behalf.

The IRS does make mistakes. We have seen cases where the IRS failed to properly discharge eligible taxes or continued sending collection notices after a bankruptcy discharge was granted. It sometimes takes follow-up calls and written correspondence with the Insolvency Department to make sure your account is correctly adjusted.

This post-discharge monitoring is a service that sets Austin & Larson apart. We stay involved after your bankruptcy closes to confirm that every eligible balance is reduced to zero and that the IRS has updated your records accurately. If there are errors, we handle the corrections directly with the IRS.

Alternatives to Bankruptcy for IRS Tax Debt

Bankruptcy is a powerful tool, but it is not always the best option. For some Ann Arbor taxpayers, other IRS programs may resolve tax debt with less long-term impact. Austin & Larson Tax Resolution evaluates all available paths before recommending a course of action.

IRS Installment Agreements let you pay your tax debt in monthly payments over time. If you can afford a monthly payment, this avoids bankruptcy entirely and keeps your credit intact.
Offer in Compromise (OIC) allows you to settle your tax debt for less than the full amount owed. The IRS considers your income, expenses, and assets. If you qualify, an OIC can reduce your total liability significantly without filing bankruptcy.
Currently Non-Collectible Status (CNC) is available if your monthly income barely covers living expenses. The IRS pauses all collection activity while your financial situation remains unchanged. Penalties and interest continue to accrue, but the IRS will not garnish your wages or levy your accounts.
Penalty Abatement can remove failure-to-file and failure-to-pay penalties if you have a reasonable cause. This reduces the total balance without affecting your credit.

Austin & Larson Tax Resolution evaluates your eligibility for each of these programs alongside bankruptcy to recommend the option that produces the best financial outcome. In some cases, a combination of strategies works best.

How Austin & Larson Helps You with Bankruptcy and IRS Tax Debt Forgiveness in Ann Arbor, MI

Austin & Larson Tax Resolution provides a complete service that bridges the gap between tax resolution and bankruptcy law. Our team of IRS Enrolled Agents, Tax Attorneys, CPAs, and Tax Accountants works alongside your bankruptcy attorney to handle the tax-specific analysis that determines your discharge eligibility.

Step 1: Free Consultation

During your first call or visit to our Ann Arbor office, we review your tax situation and discuss your financial goals. This meeting is free and confidential.

Step 2: Pull Your IRS Transcripts

We request your complete IRS Account Transcripts, which show the due date, filing date, and assessment date for every tax year. These transcripts are the foundation of the eligibility analysis.

Step 3: Analyze Each Tax Year

Bridgette Austin, JD, EA, and our team review each tax year individually against the 3-year, 2-year, and 240-day rules. We identify which years qualify for discharge and which do not, and we flag any tolling events that may affect your dates.

Step 4: Coordinate with Your Bankruptcy Attorney

We provide your bankruptcy attorney with a detailed analysis showing exactly which tax debts are dischargeable and the earliest filing date that satisfies all timing rules. If you do not yet have a bankruptcy attorney, we can provide referrals to trusted Michigan bankruptcy lawyers.

Step 5: Monitor After Discharge

After your bankruptcy closes, we follow up with the IRS Insolvency Department to confirm that all eligible taxes, penalties, and interest have been properly removed from your account. If the IRS makes errors, Dustin Larson, EA, CPA, and our team handle the corrections.

Frequently Asked Questions About Bankruptcy and IRS Tax Debt Forgiveness in Ann Arbor, MI

Can all IRS tax debt be discharged in bankruptcy?

No. Only individual federal income tax debt that meets three specific timing rules can be discharged. The tax return must have been due at least three years ago, you must have filed the return at least two years ago, and the IRS must have assessed the tax at least 240 days ago. Payroll taxes, trust fund taxes, and IRS fraud penalties cannot be discharged regardless of their age. Austin & Larson Tax Resolution reviews your complete IRS history to identify which balances qualify.

Do I need a tax attorney or a bankruptcy attorney?

You may need both. A bankruptcy attorney handles the legal filing of your Chapter 7 or Chapter 13 case. A tax resolution specialist like Austin & Larson analyzes your IRS transcripts to determine which tax years are eligible for discharge and coordinates the tax-specific details with your bankruptcy attorney. Working with both ensures no qualifying tax debt is overlooked and no filing happens too early.

How long does it take to discharge tax debt through Chapter 7?

A Chapter 7 bankruptcy typically takes three to four months from filing to discharge. However, you must first satisfy the timing rules for each tax year before you file. The preparation work, including pulling IRS transcripts and calculating discharge dates, can take a few weeks. Austin & Larson Tax Resolution handles this analysis so your bankruptcy is filed at the right time.

What happens to my credit score if I file bankruptcy?

A Chapter 7 bankruptcy stays on your credit report for up to 10 years. A Chapter 13 stays for up to 7 years. Your credit score will drop significantly in the short term. However, for taxpayers who owe large IRS balances they cannot pay, the elimination of that debt often allows them to begin rebuilding credit sooner than if they carried the tax liability indefinitely. Austin & Larson also evaluates alternatives like Offer in Compromise that may resolve your debt without a bankruptcy filing.

What if the IRS filed a Substitute for Return for me?

If the IRS filed a Substitute for Return (SFR) because you did not file your own return, that tax year is generally not eligible for bankruptcy discharge. You must have personally filed a tax return for the two-year rule to begin. In some situations, filing a replacement return after an SFR may not fix this problem. Austin & Larson reviews your transcripts to identify SFR filings and advise you on your options for those specific years.

Can bankruptcy discharge Michigan state tax debt too?

Michigan state income taxes may be dischargeable under similar rules as federal taxes, though the specifics can vary. The Michigan Department of Treasury handles state tax obligations separately from the IRS. Austin & Larson Tax Resolution works with both federal and Michigan state tax authorities to evaluate your full tax liability across all levels of government.

Is bankruptcy the only way to get IRS tax debt forgiven?

No. The IRS offers several programs that can reduce or eliminate tax debt without bankruptcy. An Offer in Compromise allows you to settle for less than the full amount. Currently Non-Collectible Status pauses collections if you cannot afford to pay. Penalty abatement removes certain penalties. The statute of limitations on IRS collections is generally 10 years, after which the debt expires. Austin & Larson Tax Resolution evaluates all options to find the best path for your situation.

How much does it cost to have Austin & Larson review my bankruptcy eligibility?

Your initial consultation is free. During this meeting, we review your tax situation and explain what needs to be done. The cost of a full transcript analysis and eligibility review depends on how many tax years are involved and the complexity of your case. We provide a clear fee estimate before any work begins.

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